Assume two power plants provide power to all of Central Connecticut: a power plant run by Turtle Power Co. and a power plant run by Ranger Power Co. Both power plants burn coal to produce electricity and produce smog as a by-product. The Turtle power plant can reduce its smog by Xy units at a marginal cost of MC (XT) = 10X7. The Ranger power plant is less efficient and can reduce its smog by Xp units at a marginal cost of MCR(Xr) = 15XR + 10. A team of environmental consultants calculate the marginal benefit of a reduction in pollution to equal 100. a. What is the socially optimal level of pollution abatement for each power plant? b. Connecticut is considering imposing a tax on power production to reduce smog. i. What tax should it impose to reach the abatement levels you calculated in part a? ii. What level of pollution abatement will each firm choose under this tax? c. Suppose that connecticut tries to reduce pollution through by mandating a reduction in smog for all power plants. Given that the state cannot pass a law with individual requirements for each firm, it requires each firm to reduce pollution by X = 8 units per year. i. Does this lead to the optimal level of pollution reduction? ii. Is it an efficient means to reduce pollution? Explain. iii. Would the outcome or efficiency change if Connecticut allowed pollution permits to be traded between Turtle Power Co. and Ranger Power Co.? Explain. Assume two power plants provide power to all of Central Connecticut: a power plant run by Turtle Power Co. and a power plant run by Ranger Power Co. Both power plants burn coal to produce electricity and produce smog as a by-product. The Turtle power plant can reduce its smog by Xy units at a marginal cost of MC (XT) = 10X7. The Ranger power plant is less efficient and can reduce its smog by Xp units at a marginal cost of MCR(Xr) = 15XR + 10. A team of environmental consultants calculate the marginal benefit of a reduction in pollution to equal 100. a. What is the socially optimal level of pollution abatement for each power plant? b. Connecticut is considering imposing a tax on power production to reduce smog. i. What tax should it impose to reach the abatement levels you calculated in part a? ii. What level of pollution abatement will each firm choose under this tax? c. Suppose that connecticut tries to reduce pollution through by mandating a reduction in smog for all power plants. Given that the state cannot pass a law with individual requirements for each firm, it requires each firm to reduce pollution by X = 8 units per year. i. Does this lead to the optimal level of pollution reduction? ii. Is it an efficient means to reduce pollution? Explain. iii. Would the outcome or efficiency change if Connecticut allowed pollution permits to be traded between Turtle Power Co. and Ranger Power Co.? Explain
