Brimstone is a caustic by-product of the production of fairy dust. The external marginal cost caused by inhalers of brimstone is indicated in the graph at right as MCP.
The marginal abatement costs to fairy dust producers (MBP = MAC) are indicated as well. Suppose that regulators overestimate the damage that brimstone causes; their best guess of the harm is shown as MCPe .

a. Show (graphically) that if regulators attempt to achieve what they believe to be an efficient amount of brimstone, it doesn't matter whether they attempt to limit the quantity of brimstone, or set what they believe to be an efficient tax.
b. Show graphically that the elasticities of the marginal abatement cost and marginal cost of pollution are irrelevant to the choice of a quantity or price intervention.
c. Show that the results you demonstrated in (a) and (b) also hold if regulators underestimate the amount of marginal pollution cost brimstone causes.

Transcribed Image Text:

Price MCP (S/unit) MCP МВР МАС Quantity of brimstone