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Figure 17.8 When Price Mechanisms Are Preferable to Quantity Mechanisms
If government regulators incorrectly estimate farmers’ marginal abatement costs at MACe < MAC, the quantity-based intervention would reduce pollution to POLLB < POLL*, while the Pigouvian tax would increase pollution to POLLC > POLL*. Because MAC is steep relative to the marginal cost of pollution MCP, the price mechanism is preferable to the quantity mechanism, as seen by comparing the resulting deadweight losses from the two interventions (Y < X).