MAC = 24 – 2E and MD = E. ‘If’ the firm innovates and switches to a newer abatement technology, it will be able to operate on MAC = 12 – E.

MAC = 24 – 2E and MD = E. ‘If’ the firm innovates and switches to a newer abatement technology, it will be able to operate on MAC = 12 – E. The current regulatory environment is such that regulations automatically update forcing firms to operate at whatever is the current socially efficient level of emissions. The govt. is considering switching to a non -updating regulatory system. The govt.’s mandate is to minimize TSC. What is the incentive for the govt. to switch to a regulatory system where regulated emissions levels do not automatically update (keeping in mind that the firm’s decision to innovate will be in response to the regulatory environment it faces).

Please show all calculations and any graphs required. Thanks.

 
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