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Consider an electricity market with two power plants. The power plants emit SO2, a harmful form of pollution that causes acid rain. Suppose the government
Consider an electricity market with two power plants. The power plants emit SO2, a harmful form of pollution that causes acid rain. Suppose the government wants to limit SO2 emissions in order to improve environmental quality and health. Power Plant A is a modern plant, so its cost of reducing pollution is cheap: MCA= QA - 20 Where MCA is plant A's marginal cost of pollution reduction, and QA is the quantity of the reduction of SO2 emissions from plant A, measured in tons. Power Plant B is an older plant, so its cost of reducing pollution is expensive: MCB= 5QB Where MCB is plant B's marginal cost of pollution reduction, and QB is the quantity of the reduction of SO2 emissions from plant B, measured in tons. Assume there is no private benefit to the plants of reducing SO2. Finally, assume the social marginal benefit of pollution reduction (which is another way to say the marginal damage of SO2 emissions) is constant at SMB=MD= $200 / ton. 1a. Draw a graph that describes the costs and benefits of pollution reduction. Put costs on the vertical axis and the quantity of pollution reduction on the horizontal axis. Draw the curves
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