Illustrating the Difference between Emissions Fees and Abatement Subsidies Using Isoquant and Isocost Geometry

Monopoly and Monopsony Power in a Market for Mud (Scahill)
May 29, 2020

Emissions fees (taxes) and abatement subsidies are common policy solutions when negative externalities, such as pollution generated from production, impact market transactions. Textbook treatment of these two policies vary in exposition and detail and are generally more descriptive than analytical. This can leave students with limited insights regarding behavioral differences that arise with these policies. In illustrating unintended policy consequences, this graphical analysis illustrates that a subsidy policy is, paradoxically, more likely to generate more pollution than a fee policy, a result consistent with Metcalf’s (2009) empirical work and a result often not well articulated in textbooks.

Christopher S Decker