Question 23-

Application 3 (20 points).

Consider the diagram below for a coal-fired power plant to comply with emission standard set by EPA.

1. What is the equilibrium level of compliance (% of time in compliance, 2 points)? What can be reason that MB of compliance is high at low levels of compliance (2 points)?

2. If the EPA were to lower the fines for a violation, how it will affect the MB and/or MC curve of compliance, explain (5 points).

3. Now the EPA decides to inspect more frequently, how it will affect the MB and/or MC curve of compliance, explain (5 points).

4. If the pollution control technology cost $500 to install which reduces all emissions at no additional cost, what level of compliance the firm manager would choose (4 points) and explain why (2 points)?