In theory, these conditions are satisfied when all economic actors face a common price,
at the margin, for their contributions to emissions (Baumol and Oates 1971). In such
circumstances, every firm in every (emissions-producing) sector has an incentive to exploit
all of its abatement opportunities until the marginal cost of reducing emissions equals the
emissions price, thereby assuring that the first three conditions listed above are satisfied.
Moreover, the cost of emissions control and the price paid for remaining emissions will be
passed forward into the prices of final goods and services. Consequently, consumers will
face prices reflecting the emissions associated with the production of the goods they buy or
the services they use. Thus, in keeping with the fourth condition above, their consumption
choices will account for their contributions to emissions.3 Because all agents will be charged
the same unit price for their direct or indirect contributions to emissions, the marginal costs
of emissions reductions of all agents will be equal.
In theory, these conditions are satisfied when all economic actors face a common price,at the margin, for their contributions to emissions (Baumol and Oates 1971). In suchcircumstances, every firm in every (emissions-producing) sector has an incentive to exploitall of its abatement opportunities until the marginal cost of reducing emissions equals theemissions price, thereby assuring that the first three conditions listed above are satisfied.Moreover, the cost of emissions control and the price paid for remaining emissions will bepassed forward into the prices of final goods and services. Consequently, consumers willface prices reflecting the emissions associated with the production of the goods they buy orthe services they use. Thus, in keeping with the fourth condition above, their consumptionchoices will account for their contributions to emissions.3 Because all agents will be chargedthe same unit price for their direct or indirect contributions to emissions, the marginal costsof emissions reductions of all agents will be equal.
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