In Smogville, the government will allow only 6 units of pollution.

There are two firms, Widget International and Smokestack, Inc. The government can either (1) have the same standards for both, allowing each 3 units of pollution or (2) give each firm the right to pollute 3 units and allow the right to be sold to the other company. Without pollution controls, each would put 6 units of pollution into the air. The marginal abatement costs (MAC, the cost of reducing pollution by one unit) are:

a. What will the total abatement cost of option (1) be?

b. In option (2), how many units of pollution will Smokestack, Inc., buy from Widget International? What is the total abatement cost in this case?

c. Why is option (2) more efficient?

Transcribed Image Text:

Units of Pollution MAC of Widget MAC of Smokestack 1 $100 2 $90 $500 $400 3 $ 80 $300 4 $70 $200 5 $ 60 6 $50 $100 $80