What are total uncontrolled emissions

Reference no: EM133501061

Problem

Two firms release a pollutant into the air. Their marginal abatement cost functions are given below where emissions are in hundreds of units per week. Social efficiency requires that total emissions be REDUCED BY 7500 UNITS per week so that total abatement equals 7500 units. MACA = 300 - 6EA MACB = 400 - 2EB

1. Graph the MAC functions in separate diagrams.

2. What are total uncontrolled emissions?

Government regulators decide to use an emission standard as the policy of choice to achieve the required reduction in pollution. The standard chosen would require equiproportionate emissions reductions by each firm (see slide 39, lesson 11 for how to allocate abatement according to the equiproportionate rule).

3. How much abatement would each firm be required to undertake given this emission standard?

4. Compute each firm's total compliance cost (note that emissions are in hundreds of units). Identify these areas in your graphs.

5. Does this standard satisfy the equimarginal principle? Explain why or why not. Suppose that instead of this emission standard the government decides to tax emissions as a source of revenue to pay for environmental protection projects.

6. What uniform tax rate should be set to achieve the required abatement at the lowest possible cost to society? How many units will each firm ABATE per week when faced with this tax rate?

HINT: Cost effectiveness requires MACA = MACB when abatement stops. Slide 29, lesson 10 and the example starting on slide 45, lesson 9 will help with this!

7. Draw new graphs to illustrate your answers to (e). Compute each firm's private cost to comply with the tax policy (remember that emissions are in hundreds of units). Identify these areas in your graphs.

8. Based on your calculations in the previous questions which policy, the standard or emissions tax, achieves the desired reduction in emissions at the lowest total social cost. How much is the cost savings? Which policy would the two polluting firms prefer and why?

Reference no: EM133501061

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