12

Student: ___________________________________________________________________________

1. A polluter with MAC = 400 - 4E will emit ________ when faced with an emissions tax of $70 per unit of
emissions.
A. 17.5 units
B. 82.5 units
C. 117.5 units
D. 120 units
2. A polluter with MAC = 600 - 5E will emit ________ when faced with an emissions tax of $200 per unit
of emissions.
A. 400 units
B. 160 units
C. 80 units
D. 40 units
3. For an industry with MAC = 480 - 2E and MDC = 4E, the socially efficient tax is equal to ________.
A. $160
B. $320
C. $240
D. $80
4. For an industry with MAC = 540 - 2E and MDC = 8E, the socially efficient tax is equal to ________.
A. $54
B. $90
C. $432
D. $720
5. When MACs differ among polluters, ________ are lower under a tax than a uniform standard meeting the
same target level of emissions.
A. private compliance costs
B. marginal abatement costs
C. total costs of the firms
D. social compliance costs
6. The incentive to innovate induced by pollution policies is referred to as ________.
A. Coase's theorem
B. the opportunity cost doctrine
C. the Porter hypothesis
D. the double dividend
7. Which of the following statements about abatement subsidies is NOT true?
A. Environmental groups dislike abatement subsidies because they appear to reward polluters.
B. Governments like abatement subsidies because they are relatively inexpensive to implement.
C. Abatement subsidies are popular with firms.
D. Abatement subsidies create perverse incentives for firms to increase emissions when their base levels
are being set.
8. A firm with MAC = 200 - 4E will abate ________ units if paid an abatement subsidy of $30 per unit
abated.
A. 7.5
B. 20
C. 42.5
D. 80
9. A firm with MAC = 500 - 2.5E will abate ________ units if paid an abatement subsidy of $120 per unit
abated.
A. 248
B. 200
C. 152
D. 48
10. Taxes are transfer payments - payments made by the polluters to the public sector and eventually to those
in society who are benefited by the resulting public expenditures - and are therefore not a social cost of
the policy.
True False
11. Emission taxes are always socially efficient because they satisfy the equimarginal principle.
True False
12. Emission taxes provide less incentive for firms to conduct R&D to find cheaper ways to reduce emissions
than standards.
True False
13. Suppose a polluting firm has MAC = 400 - E. Calculate the firm's level of emissions, abatement and
total compliance cost if it faced an effluent fee of $120 per unit of emissions.

14. Suppose a polluting firm has MAC = 500 - E. Calculate the firm's level of emissions, abatement and total
compliance cost if it faced an effluent fee of $200 per unit of emissions.

15. For an industry with MAC = 500 - 2E and MDC = 3E, calculate the socially efficient tax rate. What is the
total compliance cost to the industry if the socially efficient tax is charged?

16. For an industry with MAC = 400 - 4E and MDC = 4E, calculate the socially efficient tax rate. What are
the net social benefits of the socially efficient tax?
 The following table summarizes the marginal abatement cost functions for an industry with three
difference sources of pollution.

The marginal damage cost equation for the industry is equal to:
MDC = 2E
17. If the regulatory authority charged an emission tax of $50 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

18. If the regulatory authority charged an emission tax of $20 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

19. If the regulatory authority charged an emission tax of $40 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

The following table summarizes the marginal abatement cost functions for an industry with three
difference sources of pollution.

20. If the regulatory authority charged an emission tax of $30 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?
21. If the regulatory authority imposed a uniform standard of 80 units of emissions for each source what is
the total abatement cost of each source? Is the uniform standard cost effective?

22. Compare the total social costs by source and for the entire industry of a $90 emission tax versus a
uniform standard that achieves the same level of industry abatement as the tax.

23. Briefly discuss the two key differences between incentives to innovate under taxes versus standards.

Suppose the marginal abatement costs of a firm before a given technological improvement equal MAC1
and MAC2 is the marginal abatement cost curve the firm could expect to have after investing resources
in R&D to develop better treatment or recycling technology. So we have the following two possible
marginal abatement cost functions for the firm of:
MAC1 = 240 - 4E
MAC2 = 120 - 2E
24. If the firm faced an emission tax of $80 per unit of emissions, what is the maximum amount of money it
would be willing to spend on R&D to achieve the lower MAC? How does this amount compare to what
the firm would be willing to spend under a standard of 40 units?

25. Briefly define and explain what is meant by the double dividend of emissions taxes.
26. If a firm has MAC = 320 - 4E compare the level of abatement achieved as well as the costs to the firm
and the government of an emission tax of $80 versus an abatement subsidy of $80.
 12 Key
1. A polluter with MAC = 400 - 4E will emit ________ when faced with an emissions tax of $70 per unit
of emissions.
A. 17.5 units
B. 82.5 units
C. 117.5 units
D. 120 units
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #1
Learning Objective: 12-01 Explain and show graphically how a polluter responds to an emission tax set by the government regulator and show how to calculate the
polluters compliance costs.
2. A polluter with MAC = 600 - 5E will emit ________ when faced with an emissions tax of $200 per
unit of emissions.
A. 400 units
B. 160 units
C. 80 units
D. 40 units
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #2
Learning Objective: 12-01 Explain and show graphically how a polluter responds to an emission tax set by the government regulator and show how to calculate the
polluters compliance costs.
3. For an industry with MAC = 480 - 2E and MDC = 4E, the socially efficient tax is equal to
________.
A. $160
B. $320
C. $240
D. $80
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #3
Learning Objective: 12-02 Derive the socially efficient tax rate and illustrate graphically the costs to the polluter; the benefits to society; and the net social
benefits.
4. For an industry with MAC = 540 - 2E and MDC = 8E, the socially efficient tax is equal to
________.
A. $54
B. $90
C. $432
D. $720
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #4
Learning Objective: 12-02 Derive the socially efficient tax rate and illustrate graphically the costs to the polluter; the benefits to society; and the net social
benefits.
5. When MACs differ among polluters, ________ are lower under a tax than a uniform standard meeting
the same target level of emissions.
A. private compliance costs
B. marginal abatement costs
C. total costs of the firms
D. social compliance costs
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #5
Learning Objective: 12-04 Explain how an emission tax differs from a uniform standard in terms of social compliance costs and cost effectiveness.
6. The incentive to innovate induced by pollution policies is referred to as ________.
A. Coase's theorem
B. the opportunity cost doctrine
C. the Porter hypothesis
D. the double dividend
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #6
Learning Objective: 12-05 Contrast the impact of an emission tax with standards with respect to government revenues; incentives to innovate; enforcement costs;
and distributional impacts.
7. Which of the following statements about abatement subsidies is NOT true?
A. Environmental groups dislike abatement subsidies because they appear to reward polluters.
B. Governments like abatement subsidies because they are relatively inexpensive to implement.
C. Abatement subsidies are popular with firms.
D. Abatement subsidies create perverse incentives for firms to increase emissions when their base
levels are being set.
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #7
Learning Objective: 12-06 Explain how an emission subsidy works and how it differs from an emission tax.
8. A firm with MAC = 200 - 4E will abate ________ units if paid an abatement subsidy of $30 per unit
abated.
A. 7.5
B. 20
C. 42.5
D. 80
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #8
Learning Objective: 12-06 Explain how an emission subsidy works and how it differs from an emission tax.
9. A firm with MAC = 500 - 2.5E will abate ________ units if paid an abatement subsidy of $120 per
unit abated.
A. 248
B. 200
C. 152
D. 48
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #9
Learning Objective: 12-06 Explain how an emission subsidy works and how it differs from an emission tax.
10. Taxes are transfer payments - payments made by the polluters to the public sector and eventually to
those in society who are benefited by the resulting public expenditures - and are therefore not a social
cost of the policy.
TRUE
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #10
Learning Objective: 12-02 Derive the socially efficient tax rate and illustrate graphically the costs to the polluter; the benefits to society; and the net social
benefits.
11. Emission taxes are always socially efficient because they satisfy the equimarginal principle.
FALSE

Emission taxes are always cost effective because they satisfy the equimarginal principle. They are
only socially efficient if they result in the socially efficient level of emissions.

Accessibility: Keyboard Navigation

Difficulty: Easy
Field - Chapter 12 #11
Learning Objective: 12-03 Prove that any tax rate set by the government is cost effective.
12. Emission taxes provide less incentive for firms to conduct R&D to find cheaper ways to reduce
emissions than standards.
FALSE
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 12 #12
Learning Objective: 12-05 Contrast the impact of an emission tax with standards with respect to government revenues; incentives to innovate; enforcement costs;
and distributional impacts.
13. Suppose a polluting firm has MAC = 400 - E. Calculate the firm's level of emissions, abatement and
total compliance cost if it faced an effluent fee of $120 per unit of emissions.

The firm will emit where MAC = tax:

400 - E = 120
E = 2 (400 - 120) = 560
Abatement will equal the unregulated level of emissions minus emissions of 560. Unregulated
emissions are found where MAC = 0:
400 - E0 = 0
E0 = 800
So abatement equals 240 units. The total compliance cost of the firm will equal the sum of its total
abatement cost and the emission taxes it pays. Total abatement cost is the area under the MAC curve
from emissions of 560 to emissions of 800:
TAC = (240 120) = $14,400
Total taxes paid will equal the level of emissions times the tax of $120 per unit of emissions:
Taxes paid = 120 560 = $67,200
Total compliance cost of the firm is therefore $81,600.

Difficulty: Moderate
Field - Chapter 12 #13
Learning Objective: 12-01 Explain and show graphically how a polluter responds to an emission tax set by the government regulator and show how to calculate the
polluters compliance costs.
14. Suppose a polluting firm has MAC = 500 - E. Calculate the firm's level of emissions, abatement and
total compliance cost if it faced an effluent fee of $200 per unit of emissions.

The firm will emit where MAC = tax:

500 - E = 200
E = 300
Abatement will equal the unregulated level of emissions minus emissions of 300. Unregulated
emissions are found where MAC = 0:
500 - E0 = 0
E0 = 500
So abatement equals 200 units. The total compliance cost of the firm will equal the sum of its total
abatement cost and the emission taxes it pays. Total abatement cost is the area under the MAC curve
from emissions of 300 to emissions of 500:
TAC = (200 200) = $20,000
Total taxes paid will equal the level of emissions times the tax of $200 per unit of emissions:
Taxes paid = 200 300 = $60,000
Total compliance cost of the firm is therefore $80,000.

Difficulty: Moderate
Field - Chapter 12 #14
Learning Objective: 12-01 Explain and show graphically how a polluter responds to an emission tax set by the government regulator and show how to calculate the
polluters compliance costs.
15. For an industry with MAC = 500 - 2E and MDC = 3E, calculate the socially efficient tax rate. What is
the total compliance cost to the industry if the socially efficient tax is charged?

The socially efficient level of emissions equates MAC to MDC:

500 - 2E = 3E
E = 500/5 = 100
Substituting this back into the MAC equation yields the socially efficient tax rate:
Tax = MAC = 500 - 2(100) = $300
The total compliance cost of the industry will equal the sum of its total abatement cost and the
emission taxes paid. Total abatement cost is the area under the MAC curve from emissions of 100 to
emissions of 250:
TAC = (150 300) = $22,500
Total taxes paid will equal the level of emissions times the tax of $300 per unit of emissions:
Taxes paid = 300 100 = $30,000
Total compliance cost of the firm is therefore $52,500.

Difficulty: Moderate
Field - Chapter 12 #15
Learning Objective: 12-02 Derive the socially efficient tax rate and illustrate graphically the costs to the polluter; the benefits to society; and the net social
benefits.
16. For an industry with MAC = 400 - 4E and MDC = 4E, calculate the socially efficient tax rate. What
are the net social benefits of the socially efficient tax?

The socially efficient level of emissions equates MAC to MDC:

400 - 4E = 4E
E = 400/8 = 50
Substituting this back into the MAC equation yields the socially efficient tax rate:
Tax = MAC = 400 - 4(50) = $200
The net social benefits are equal to the forgone damage costs minus the total compliance cost of
the industry. The forgone damage costs equal the area under the MD curve from the initial level of
emissions to the socially efficient level, E*:
Forgone damages = (100 400) - (50 200) = 20,000 - 5,000 = $15,000
Total abatement cost is the area under the MAC curve from emissions of 50 to emissions of 100:
TAC = (50 200) = $5,000
The net social benefits will equal the forgone damages minus the TAC:
Net social benefits = 15,000 - 5,000 = $10,000
The net social benefits of the socially efficient tax are therefore $10,000.

Difficulty: Moderate
Field - Chapter 12 #16
Learning Objective: 12-02 Derive the socially efficient tax rate and illustrate graphically the costs to the polluter; the benefits to society; and the net social
benefits.
The following table summarizes the marginal abatement cost functions for an industry with three
difference sources of pollution.

The marginal damage cost equation for the industry is equal to:
MDC = 2E
Field - Chapter 12
17. If the regulatory authority charged an emission tax of $50 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

Each source will emit where MAC = tax so:

MACA = 200 - 4EA = 50
EA = 150/4 = 37.5
MACB = 250 - 5EB = 50
EB = 200/5 = 40
MACC = 100 - 2EC = 50
EC = 50/2 = 25
Total abatement cost for each source is equal to the area under the MAC curve:
TACA = (12.5 50) = $312.50
TACB = (10 50) = $250
TACC = (25 50) = $625
We can see that the lower the costs of the source, the more abatement that source undertakes when the
tax is in place. Furthermore, the tax is cost effective because the MAC of each source is equal to $50
so the equimarginal principle is satisfied.

Difficulty: Moderate
Field - Chapter 12 #17
Learning Objective: 12-03 Prove that any tax rate set by the government is cost effective.
18. If the regulatory authority charged an emission tax of $20 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

Each source will emit where MAC = tax so:

MACA = 200 - 4EA = 20
EA = 180/4 = 45
MACB = 250 - 5EB = 20
EB = 230/5 = 46
MACC = 100 - 2EC = 20
EC = 80/2 = 40
Total abatement cost for each source is equal to the area under the MAC curve:
TACA = (5 20) = $50
TACB = (4 20) = $40
TACC = (10 20) = $100
We can see that the lower the costs of the source, the more abatement that source undertakes when the
tax is in place. Furthermore, the tax is cost effective because the MAC of each source is equal to $20
so the equimarginal principle is satisfied.

Difficulty: Moderate
Field - Chapter 12 #18
Learning Objective: 12-03 Prove that any tax rate set by the government is cost effective.
19. If the regulatory authority charged an emission tax of $40 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

Each source will emit where MAC = tax so:

MACA = 200 - 4EA = 40
EA = 160/4 = 40
MACB = 250 - 5EB = 40
EB = 210/5 = 42
MACC = 100 - 2EC = 40
EC = 60/2 = 30
Total abatement cost for each source is equal to the area under the MAC curve:
TACA = (10 40) = $200
TACB = (8 40) = $160
TACC = (20 40) = $400
We can see that the lower the costs of the source, the more abatement that source undertakes when the
tax is in place. Furthermore, the tax is cost effective because the MAC of each source is equal to $40
so the equimarginal principle is satisfied.

Difficulty: Moderate
Field - Chapter 12 #19
Learning Objective: 12-03 Prove that any tax rate set by the government is cost effective.
The following table summarizes the marginal abatement cost functions for an industry with three
difference sources of pollution.

Field - Chapter 12
20. If the regulatory authority charged an emission tax of $30 per unit of emissions what is the level of
emissions and the total abatement cost of each source? Is the tax cost effective?

Each source will emit where MAC = tax so:

MACA = 100 - EA = 30
EA = 70
MACB = 300 - 3EB = 30
EB = 270/3 = 90
MACC = 200 - 2EC = 30
EC = 170/2 = 85
Total abatement cost for each source is equal to the area under the MAC curve:
TACA = (30 30) = $450
TACB = (10 30) = $150
TACC = (15 30) = $225
We can see that the lower the costs of the source, the more abatement that source undertakes when the
tax is in place. Furthermore, the tax is cost effective because the MAC of each source is equal to $30
so the equimarginal principle is satisfied.

Difficulty: Moderate
Field - Chapter 12 #20
Learning Objective: 12-04 Explain how an emission tax differs from a uniform standard in terms of social compliance costs and cost effectiveness.
21. If the regulatory authority imposed a uniform standard of 80 units of emissions for each source what is
the total abatement cost of each source? Is the uniform standard cost effective?

When each firm emits 80 units, the MAC of each firm will be:
MACA = 100 - 80 = 20
MACB = 300 - 3(80) = 60
MACC = 200 - 2(80) = 40
Total abatement cost for each source is equal to the area under the MAC curve:
TACA = (20 20) = $200
TACB = (20 60) = $600
TACC = (20 40) = $400
The standard is not cost effective because the MAC of each source is not equal.

Difficulty: Moderate
Field - Chapter 12 #21
Learning Objective: 12-04 Explain how an emission tax differs from a uniform standard in terms of social compliance costs and cost effectiveness.