Emission taxes can lead to efficient pollution abatement. As in Figure
17-3 , Firm A faces a lower marginal cost of pollution abatement than
does Firm B. Suppose the regulatory authority imposes a tax of t dollars
per unit of pollution emitted. Since each firm would then save t dollars for
each unit of pollution it does not produce, t is each firm’s marginal benefit
of pollution abatement.
Firm A chooses to reduce its pollution by. Up to this point, the tax
saved (marginal benefit) from reducing pollution exceeds the marginal
cost of reducing pollution. Firm B chooses to abate only a small amount of
pollution,.
Since the marginal cost of abatement is equated across firms, the total
amount of pollution abatement is achieved at minimum cost.
This is efficient pollution abatement.
Note that when all firms facing an emissions tax are maximizing their
profits, they will each abate pollution until their own marginal cost is
equal to the tax. It follows that their marginal costs will be equated and
thus the condition will be satisfied for efficient pollution abatement. This
efficiency is the first and central advantage of emissions taxes, especially
as compared to direct regulatory controls.
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