If the Firm Faced an Emission Tax of $80 Per

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The Answer is Under the emission tax,the firm's total compliance costs (TCC)consist of its TAC and its tax bill.It will be willing to spend the difference between its TCC under the two different technologies.Under the old technology,the firm will emit 40 units if the tax is $80.This yields:
TCC₁ = TAC₁ + taxes paid = ½(20 *80)+ 80 * 40 = 800 + 3,200 = $4,000
Under the new technology,the firm will emit 20 units if the tax is $80.This yields:
TCC₂ = TAC₂ + taxes paid = ½(40 * 80)+ 80 * 20 = 1,600 + 1,600 = $3,200
The change in TCC is equal to -$800 and represents a savings in cost.So this revenue would be the amount the firm would be willing to spend on R&D to achieve the lower MAC.If instead the firm faced a standard of 40 units,it would be willing to spend the difference between its total abatement cost under the old technology and its TAC under the new technology (since its total compliance costs under the standard equal its TAC).

\Delta

TCC =

\Delta

TAC = TAC₂ - TAC₁ = ½(20 * 40)- ½(20 * 80)= 400 - 800 = -$400
This saving in cost would be the amount the firm would be willing to spend on R&D under a standard of 40 units.We can see that the tax provides greater incentive to conduct R&D than the standard.

If the Firm Faced an Emission Tax of $80 Per

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