Ground-level ozone (O3), commonly known as smog, arises from a sunlight-inducedchemical reaction between nitric oxides (NOx) and volatile organic compounds (VOCs),which come from vehicle and industrial emissions. It's the largest source of air pollutioncontributing to human health problems, including asthma attacks that sometimes resultin death. Ozone also reduces crop yields and causes various other damages to naturalecosystems.Reducing ozone concentrations is costly, requiring that more expensive emissions reducing technologies be installed in power plants, factories and on vehicles. Alternatively,we can drive more fuel efficient and less powerful cars, drive less, or otherwise use lessenergy and consume fewer goods derived from polluting industrial activities.Suppose that we have investigated the various ways of reducing ozone concentrations,and sorted them from lowest cost per unit of ozone abatement to highest cost per unit of abatement. We then summed up the total cost, measured in billions of US dollars, needed to achieve needed to achieve different levels of abatement, and fit a curve to it. Suppose this curve is given by the functionC(X) = 0.4X+ 0.1X2, where X is the total amount of abatement in ozone parts per billion (ppb). The benefits of abatement, in terms ofcollective willingness to pay for reduced mortality, morbidity, higher crop production andhealthier natural environs is B(X) = 10X0.06X2.

4. Draw a graph that plots the marginal cost of abatement and the marginal benefits of abatement. Label the optimal level of abatement and the value to society of thatlevel of abatement.

5. Suppose current ozone concentrations, before any abatement, are typically 50 ppb.An environmental interest group argues that the benefits of reducing concentrations to zero are larger than the costs. Are they correct? What's wrong or missing from their argument?

6. Again assuming current concentration is 50 ppb, how much would have to be spent on abatement to achieve the economically efficient level of ozone concentrations?

7. What is the net benefit, relative to the status quo of 50 ppb, of achieving the economically efficient level of ozone concentrations?

8. How do you suppose the cost and benefit functions might be estimated? Brieflydiscuss various aspects you might consider.

9. what are three reasons given by Keohane and Olmstead, for someone interested in other aspects of environmental studies to learn environmental economics? Can you think of any other reasons?