Question

Suppose the following are the MSB and MSC functions for PSD and nonattainment areas in Denver, Colorado:

PSD : MSBPSD = 30 ‒ 0.2A NON : MSBNON = 34 – 0.3A

MSCPSD = 12 + 0.1A MSCNON = 18 + 0.2A

where A is the level of abatement in each region.

1. Find the efficient abatement level for each area, i.e., APSD and ANON. Based on these results, are the differentiated standards for PSD areas supported on efficiency grounds? Briefly explain why or why not.

2. Is the relationship between MSBPSD and MSBNON reasonable based on the legislated distinction between PSD areas and nonattainment areas? Briefly explain. please give full answers

Answer 1

1.

MSBPSD = 30 -0.2A, MSBNON = 34 -0.3A

MSCPSD = 12 + 0.1A, MSCNON= 18 + 0.2A

For APSD, MSBPSD = MSCPSD

=> 30 -0.2A = 12 + 0.1A

=> 0.3A = 18

=> A = 60

For ANON, MSBNON = MSCNON

=> 34 -0.3A = 18 + 0.2A

=> 0.5A = 16

=> A = 32

Yes, the differentiated standards for PSD areas are supported on efficiency grounds, beacause, the marginal social benefit is equal to the marginal social cost level in each case.

2.

MSBPSD = 30 - 0.2(60) = 30 -12 = 18

MSBNON = 34 - 0.3(32) = 34 - 9.6 = 24.4

The relationship between MSBPSD and MSBNON are reasonable because the PSD areas are highly developed and have access to the opportunities, whereas, the non-attainment areas have very low access to such opportunities as compared to the PSD areas.