In part 2 Professor Ambec continues the comparison between emission caps and taxes under the given setting from part 1. He shows how to minimize the loss of welfare to society and when it is better to use a cap and tax respectively. For example, which is best when the damage slope is rather flat?
What can you as an economical adviser contribute to a regulator?
There are also systems more complicated than just a tax or just a cap. Ambec shows an example of this before he starts discussing Contract-based regulations. That is when the polluting firm is free to accept or not the regulation.
One method firms use to for example compensate for CO2 emissions is to pay a farmer for some land where he starts planting trees, another is to subsidize organic farmers to reduce pesticides and fertilizers, and this can also apply to voluntary agreements.
He goes through the Revelation Principle and states that without generality we can rely on direct revelation mechanisms and that you cannot do better in term of welfare than with the direct revelation mechanisms.
