An emissions fee is preferable to a cap-and-trade when MSB are elastic and costs are uncertain.

Question

Quizplus · Accepted Answer

When MSB (Marginal Social Benefits) are elastic, it means that society values the reduction of emissions highly. In such cases, an emissions fee would be preferable to a cap-and-trade system because it would directly set a price on emissions and provide certainty for firms to make decisions towards reducing their emissions. On the other hand, a cap-and-trade system would only provide an uncertain quantity of emissions because the cap may be too high or too low. Additionally, when costs are uncertain, an emissions fee would allow for easier cost-benefit analysis for firms as they can anticipate their costs and plan for emissions reduction accordingly.

An Emissions Fee Is Preferable to a Cap-And-Trade When MSB