Question 5: Pollution Tax and Firm Behavior (4 points total) Suppose a regulator has revealed to a firm that it is consi

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Question 5 Pollution Tax And Firm Behavior 4 Points Total Suppose A Regulator Has Revealed To A Firm That It Is Consi 1 (115.1 KiB) Viewed 34 times

Question 5: Pollution Tax and Firm Behavior (4 points total) Suppose a regulator has revealed to a firm that it is considering instituting a pollution tax. The regulator must weigh the marginal benefits and marginal costs of pollution reduction when it decides how much the tax should be (it will try to determine the optimal level of pollution). a) Before deciding on the tax, the regulator asks the firm for information about their firm's abatement costs. If a firm were strategizing to have the lowest-costs possible after the tax is imposed, would it have the incentive to over-state or under-state its true abatements costs? (1 points) b) Why? Demonstrate your answer graphically and be sure to include and label all axes, curves, and abatement levels associated with an optimal policy and the resulting policy. Please shade the area of the graph that represents the firm's incentives in this situation and supports your answer to a). (3 points) $ Abatement