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Instrument Choice under uncertainty

Instrument Choice under uncertainty. Lecture 6. Graphical model. Choice of policy instruments under uncertainty. Here we again assume a single Marginal abatement cost curve, but add MB of abatement. Also add uncertainty. Uncertainty in Marginal Costs. Case 1 (MC steep, MB flat)

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Instrument Choice under uncertainty

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  1. Instrument Choice under uncertainty Lecture 6

  2. Graphical model • Choice of policy instruments under uncertainty. • Here we again assume a single Marginal abatement cost curve, but add MB of abatement. • Also add uncertainty.

  3. Uncertainty in Marginal Costs • Case 1 (MC steep, MB flat) • In this case, taxes lead to smaller dead-weight loss.

  4. Graph 3b, case 1 MACAct Cost MACEx MB Abatement

  5. Steps to finding DWL • Find the Q* (optimal quantity) • Find the Qact (Abatement actually produced) • For the area between Qact and Q* find how much costs exceed benefits. • These steps are simpler for permit than for tax.

  6. Graph 3b, case 1 with Q-instrument MACAct Cost MACEx MB Qact Q* Abatement

  7. Graph 3b, case 1 with Q-instrument MACAct Cost MACEx MB Qact Q* Abatement

  8. Graph 3b, case 1 with tax MACAct Cost MACEx tax MB Abatement

  9. Graph 3b, case 1 with tax MACAct Cost MACEx tax MB Q* Abatement Qactual

  10. Graph 3b, case 1 with tax MACAct Cost MACEx tax MB Q* Abatement Qactual

  11. Results so far • If • MB flat & • MC steep, but uncertain • Then • Tax produces too little abatement • Permits/standards produce too much • DWL is smaller with tax • Results reversed if MB steep and MC flat

  12. Extensions • MB uncertain • Two policies identical • Considering the key assumptions • Inability to change policy • Benevolent regulator • No consideration of political feasibility • Applying the model to climate change

  13. The Bush Administration stated in 2001 that the United States would pull out of the Kyoto Protocol signed in Japan in 1997 and no longer consider the ratification process. On February 14, 2002 they announced their alternative to Kyoto called the Clear Skies Initiative. Your assignment is to read about that initiative in detail, while trying to separate political spin from scientific fact. Then research the Kyoto Protocol, doing the same thing. Summarize each and discuss whether the Clear Skies Initiative is better, worse or no different from Kyoto Protocol. If you were able to advise the Bush Administration, would you support either of these proposals in their current form or would you suggest some additional modifications to policy.

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