Question

Suppose the economy had a single consumer with MD = .25x and two firms with, MAC_1...

Suppose the economy had a single consumer with MD = .25x and two firms with, MAC_1 = 120 - .4x_1 and MAC_2 = 180 - .5x, respectively. If the consumer has the right to a clean environment and was willing to allow 100 units of pollution (if adequately compensated), which firm would end up producing? Why? Does that seem efficient?

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Answer #1

If the economy had a single consumer with MD=0.25x

and MAC1=120-0.4x

MAC2=180-0.5x

Then in the economically efficient case, both will abate upto MAC1=MAC2 and until then we will abate from whichever has higher MAC

So in the efficient case, firm 2 with MAC_2 will abate upto 100 units of pollution.

Also since firm 2 has a higher MAC, it will be willing to pay higher to avoid abating and thus firm 2 would end up producing.

Hope it helps. Do ask for any clarifications required.

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