Question
 Under uncertainty about a firm's Marginal
Abatement Cost (MAC), explain when an emissions tax is economically preferable to a quantity standard (cap), according to the Weitzman analysis.Solution
Solution: The Weitzman Rule (1974) determines the preferable instrument under cost uncertainty. If the Marginal Damage (MD) curve is flat, small mistakes in the pollution level (the outcome of an uncertain MAC) lead to small changes in total damage (cost). In this case, controlling the price (Tax) is preferable, as it minimizes the deadweight loss (cost of error). If the MD curve were steep, controlling the quantity (Cap) would be preferable to avoid catastrophically high damages from quantity mistakes.
Select the most appropriate option to fill in the blank.
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