Question Two Compare the incentives for innovation with the following three diff

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Question Two Compare the incentives for innovation with the following three different environmental policy instruments . emissions standard . emissions tax a system of marketable tradable permits Rank these three policy instruments in terms of their incentives for innovation in both the short and the long run. (The "short run" refers the period of time in which prices (e.g., the permit price) and other policy variables (e.g., the emissions tax) are fixed; in the long run, the values of the variable are allowed to change.) Use Figure One (attached) to justify your ranking In Figure One, pollution (E) is on the horizontal axis and all monetary values (e.g., permit price (p*) and the tax on emissions (t")) are on the vertical axis. In the absence of regulation, the firm would emit E1 quantity of emissions and not pay any costs of pollution clean-up. The firm's original marginal abatement cost curve (in the absence of innovation) is given by MAC1(E), and shows the marginal costs of abatement of pollution for different levels of pollution In the first case, an emissions standard is set that allows the firm to only emit pollution up to the quantity, S1. With an emissions tax policy, an emissions tax of t* is set that achieves the same level of reduction in pollution as the emissions standard. With the marketable tradable permit system, permits for the right to emit are auctioned off by the government regulatory agency responsible for achieving environmental policy goals. The permit price is p and the firm buys permits that allows it to emit the same quality of emissions as with the standard and the tax Now suppose that firm is able to reduce its costs of pollution control as a result of its own research and development efforts. The new marginal abatement cost curve is given by MAC2(E) Hint: How much cost saving would result with the three different policy instruments from the firm's research and development efforts? (See Hanley et al., Section 5.6.1, Innovation and Cost Savings over Time, p. 162 - 164 for more on the subject)

Explanation / Answer

Here we have three types of environmental policy instruments, those are emissions standard, emission tax and a system of marketable tradable permits. as shown in the figure environmental policy instruments shows different results. All these are the impacts of environmental regulations on firms. The environmental regulations can lead to statistically significant adverse effect on trade, employment, plant ,location and productivity in the short run. this partial equlibrium model examin the incentives which is induced comparing the policies to the benchmark situation. Emmission tax is equal to the damage due to polution. in long run the price and other policy variables are constant this lead to better out come than short run. this model shows cost efficiency of this policy as it not higher than the current price. This also lead to input mix out put efficiency. The need to achive competitiveness in the organization innovation and invest in technology is compulsory. to meet economic growth and growing need these policies are need to be enforced.

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