Problem B

Assume that two power plants, Firm 1 and Firm 2, release sulfur dioxide (SO2) in Atlanta that exceeds the emissions standard. To meet the standard, 40 units of SO2 must be abated in total. The two firms face the following abatement costs:

MAC1 (Marginal Abatement Cost for Firm 1) = 10 + 0.5A1

MAC2 (Marginal Abatement Cost for Firm 2) = 5+ 2.5A2

The costs are measured in thousands of dollars.

With your knowledge of the Government Approach to Market Failure

1. (a) Prove that a uniform standard will not meet the cost-effectiveness criterion.

(b) Show your results in a graph that is properly labeled.