How to minimize cost of a firm

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Reference no: EM13176820

1) Under a strict command and control framework, suppose abatement standards are set equally across polluters. Assume the total abatement target is set at 30 units. Show the cost implications using three graphs, each of a different polluter with a unique MAC curve drawn to depict a "low cost abater," a "moderate cost abater," and a "high cost abater." On each graph, identify the abatement level corresponding to a uniform standards approach. and show the level of MAC at that point and the area corresponding to TAC.

2) It is well documented that carbon monoxide (CO) emissions from combustible engines increase in colder climates. This in turn implies that damages are expected to be less severe in summer months than in winter. Nonetheless, air quality control authorities use a standard for CO that is uniform throughout the year with no allowance for seasonal effects. Use this information and the following model to answer the questions below.

MSB of CO abatement in winter = 350 - 0.5A;

MSB of CO abatement in summer = 140- 0.2A;

MSC of CO abatement = 0.2A,

where A is the level of CO abatement

a. Graph the MSB and MSC functions on the same diagram.

b. Assume the government sets a uniform standard for winter and summer at A = 500. Support or refute this policy based on the criterion of allocative efficiency, using your model to explain your response.

c. If you were in charge of setting policy for CO emissions, what action would you recommend to assure an allocatively efficient outcome across the two seasons?

3) Assume that two power plants, Firm 1 and Firm 2 release sulfur dioxide (SO2) in a small urban community that exceeds the emissions standard.To meet the standard, 30 units of SO2 must be abated in total. The two firms face the following abatement costs:

MAC1=16+0.5 A1, MAC2=10+2.5 A2 where costs are measured in thousands of dollars.

a. Prove that a uniform standard will not meet the cost effectiveness criterion.
b. Determine how the abatement levels should be reallocated across the two firms to minimize costs.

Reference no: EM13176820

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