1. incentives for innovation

2. Incentives for Innovation Suppose that a polluting firm's current marginal abatement cost function is given by MAC, in the figure below. Suppose that the firm expects that investing in RAD would lead to a decrease in the marginal abatement costs as given by MACz. $ MACI MAC Emissions 5 10 Suppose that the regulator imposes an emissions tax of / that the firm must pay per unit of emissions. The total compliance cost of the firm (TCC) is therefore comprised of total abatement cost (TAC) and total emissions fees (TEF) from the tax. BEFORE investing in RED, what area represents: 1. the total abatement cost (TAC)? 2. the total emissions fees (TEF)? AFTER investing in R&D what area represents: 1. the total abatement cost (TAC)? 2. the total emissions charges (TEC)?What is the "incentive to innovate" (ie. what are the cost savings from making abatement cheaper)? Now, suppose instead the regulator imposes a fixed performance standard of 5 units of emissions What is the "incentive to innovate" under this policy