Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

need help with economics question Suppose there are two firms, each of which can emit, at most, 25 tons of pollution into the environment per

need help with economics question

image text in transcribed
Suppose there are two firms, each of which can emit, at most, 25 tons of pollution into the environment per year. Assume that each firm maximizes their profit at this pollution level, implying that they will each emit 25 tons unless subject to a regulation or penalty. However, each firm also has the capacity to abate some or all of their pollution, meaning that they can choose an abatement level anywhere between 0 and 25 tons (0 tons of abatement implies 25 tons of pollution and 25 tons of abatement implies 0 tons of pollution). Let A1 denote Firm 1's abatement and let A2 denote Firm 2's abatement. The firms' marginal abatement cost (MAC) functions are shown below, where MAC is denominated in dollars per ton, and A1 and A2 are denominated in tons. (Assume that there are no fixed costs associated with pollution abatement.) Firm 1: MAC1 = 1.5A1 Firm 2: MAC2 = 2.0A2 a) Suppose that a pollution tax of $21 per ton were enacted. Explain in words and with a clearly labeled graph why 10 tons of abatement is not Firm 1's optimal response to this $21 per ton tax. b) What are Firm 1's total abatement costs and total tax burden when it abates 10 tons? Identify these amounts on the graph you drew for a) and explain how Firm 1 could lower its combination of tax costs and abatement costs by choosing a different abatement level. Would Firm 1 like to increase or decrease abatement (relative to 10 tons) and why? c) Suppose the EPA decided that 20 tons of pollution abatement was socially desirable and they mandated that each firm reduce 10 tons. Evaluate the cost implications of this policy. Would it be possible to improve on this initial abatement allocation? If so, what would be the gains? d) If Firm 1 were the only source of pollution and the marginal benefits (MB) of pollution abatement were given by MB = 40 - 1.8A1, at what level would you recommend that the regulator set a pollution tax? Why

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The End Of Poverty Economic Possibilities For Our Time

Authors: Jeffrey D Sachs, Bono

1st Edition

0143036580, 9780143036586

More Books

Students also viewed these Economics questions