Question

Suppose there are only two sources of SO2 emissions in Ohio. Source 1 is a coal fired power plant and Source 2 is an oil refinery. Marginal control costs for the two firms are given by MCC1=100*q1 and MCC2=300*q2, where q1 and q2 represent the tons of pollution that each respective firm controls. Each of these two sources both currently emits 20 tons of sulfur dioxide. Ohio's government decides that it wants to reduce SO2 pollution by 20 tons total.

1. Graph the marginal control cost curves for both firms from 0 to 20 tons of pollution control. Label where they cross. (Hint: graph Firm 1 from left to right and Firm 2 from right to left.)

2. Suppose government decides to use a command and control approach where each of the two sources reduces its emissions by 10 tons of SO2. Calculate the total control cost for each pollution source and for the state as a whole.

Next, suppose the government decides to try out a tradable permit program. Ohio allocates the permits based upon the historical pollution levels of the two firms. Each permit corresponds to 1 ton of SO2. Firm 1 (the coal fired power plant) is given 12 permits and Firm 2 (the oil refinery) is given 8 permits.

3. What is the final permit price for 1 ton of SO2 emissions? Why?

4. Calculate the total control cost for each pollution source and the total control cost for the state

Answer 1

ANSWER:

The above figure shows the control cost of the two firms along with their emission.

-> Hence the total cost of abating the 10 units of pollution for both of the firms are as follows:

For Firm 1:- Total cost is (TC1) = ( 0.5 * 1000 *10) = 5000.

For Firm 2:- Total cost is (TC2) = (0.5 * 3000 * 10) = 15000.

Therefore finally Total = TC1 + TC2

= 5000+15000

=20000.

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