Question

MAC = 90 – E and Marginal Damages is MD = 30 + 2E, where E is measured in tonnes. 19) Suppose the Chemical Company owns the river. Begin by assuming there has not been any agreement. The Fishery offers the Chemical Company $50 per tonne of abatement, and the Chemical Company agrees. What will be resulting Net Social Benefit (NSB) of the agreement?

Answer 1

Efficient level of E before taxes,

MAC =MD

MAC =90-E

MD =30+2E

Thus, 90-E =30+2E

90-30=2E+E

60=3E

E=20

First,we will calculate total abatement cost,

TAC =90E+E²/2

So at E =20

TAC = 90(20)+(20)²/2

=2000

Now, tax of $50 is imposed,

So efficient level of E will be at,

MAC = TAX

MAC = 90-E

Tax = $50

90-E = 50

E = 90-50

E =40

So here total payment of tax =40*50 =$2000

NOW, TAC = (90*40)+(40)²/2 =4400

Now Net social benefit of agreement = Total damage forgone - Total abatement cost

Total damage forgone = Tax * Emission level before taxation

$50*20=$1000

AND TAC =$4400

Thus Net social benefit = $1000 - $4400 =-3400