Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively high or a relatively low MB curve, so its expected MB curve is the same as the one in Figure 17.4. Should the government use an emissions fee or an emissions standard to maximize expected welfare? Explain. (Use an analysis similar to that employed in Figure 17.4.)
Figure 17.4: Fees Versus Standards Under Uncertainty