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A firm has several increasingly-costly methods of abating its annual carbon emissions from current levels of 20KT (20 thousand tonnes). It can abate up to
A firm has several increasingly-costly methods of abating its annual carbon emissions from current levels of 20KT (20 thousand tonnes). It can abate up to 5KT of C02 at a cost of $10/tonne; up to 5KT more at a cost of $20/tonne; up to 5KT more at a cost of $50/tonne; and finally up to 5KT more at a cost of $100/tonne. The private marginal benefit of abatement is zero, so the firm has no private incentive to do any abatement if there is no government policy. To be compliant with any relevant laws, the firm can either just pay the required costs (e.g., the carbon tax) or it can choose to incur the costs of abating some units of emissions. Define the cost of compliance as the sum of any tax payments plus the total costs of abatement incurred. Assume the firm responds to any policy by minimizing its cost of compliance. Which of the following is true? A) The total cost of abatement (not including carbon tax payments) if the carbon tax is equal to $40/tonne would be $150,000. B) The total tax paid if there is a carbon tax equal to $40/tonne would be $800,000. C) A
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