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    Question

    Ā 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.
    A When the Marginal Damage (MD) curve is relatively flat (inelastic) compared to the MAC curve. Correct Answer Incorrect Answer
    B When MAC is highly inelastic. Correct Answer Incorrect Answer
    C When the MD curve is perfectly vertical (highly elastic). Correct Answer Incorrect Answer
    D The quantity standard is always preferable under uncertainty. Correct Answer Incorrect Answer

    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.

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