A
Suppose that in a cap-and-trade policy, the government sets the cap according to the expected
marginal abatement cost, and expects the equilibrium price of a permit to be $40.
However, the government observes the equilibrium price of a permit to be $33. So it suggests that
the government should
decrease increase its expectation of the true abatement cost.
B
According to the Weitzman rule, when the
of abatement is uncertain, tax and
cap-and-trade can lead to different outcomes.
Specifically, if the
curve is relatively steep,
is preferred because
it creates a smaller
However, if that curve is relatively flat, the opposite is true.
marginal cost marginal benefit
marginal benefit marginal cost
tax cap-and-trade
deadweight loss social surplus emission quantity abatement quantity
