Question

Suppose that there are two firms (1 and 2) with marginal abatement cost (MAC) curves as follows:

MAC1 = 160 − 4E1

MAC2 = 100 − E2

(E1 and E2 represent the respective amounts of emissions in litres.)

a-)What are the marginal abatement cost curves of these two firms as a function of their abatement?
b-)What would the industry-wide emissions be after 40 litres of abatement?
c-)Calculate the industry total cost of abatement if each firm abates 20 litres.
d-)Derive the industry MAC curve for this industry.
e-)What is the minimum cost way of achieving 40 litres of abatement in this industry?
f-)Now assume that marginal damages from emissions of this pollutant are given by MD=2E. What is the socially optimal level of emissions?
g-)What is the minimum cost way of achieving this level of emissions?

Answer 1