Consider a situation in which the government has limited information a

Consider a situation in which the government has limited information about costs and benefits of pollution abatement associated with a given industry.

However, it is known that the marginal social cost curve for emissions is much steeper than the marginal cost of abatement curve (in absolute terms). In this situation, which method of emissions control is preferable when the greatest concern is with accuracy of control rather than the cost of control? That is, should a fee be used or should a standard be used? Explain.

ANSWER

In this problem, a standard is preferable to a fee. The reason is that for a given percent error in either method, the fee produces a much bigger social cost. One should note, when information is not complete, standards offer more certainty about emissions levels, but leave the costs of abatement uncertain. Fees offer more certainty about costs, but leave reductions in emissions uncertain.

The relative slopes of the curves are important in determining which method of control yields the greatest variation in possible increase in social cost.