Question

MACa = 400 – E, MACb = 300 – E, and MACc = 200 – E. MD = 2E/3, where MAC is Marginal Abatement Cost, MD is marginal damages, and E is emissions.

The regulator is currently using uniform standards to regulate the firms to 270 units of emissions
collectively. (All else equal) What is the Net Social Benefit of switching to individualized
standards?

Answer 1

MD or marginal damage can be explained as marginal benefit of shortening emissions or damages preserved. whereas MAC or marginal abatement cost is the cost of reducing emissions.

The efficient level of emissions which is the level of emission maximizing social net benefits where MD=MAC.

For each alternative firms a,b,c to reduce emissions , the net social benefits of switching to any of these individual standards rather using uniform standard to regulate firms to emit 270units collectively will be preferred if it can emit less than the standard units.

for firm a, MACa=MD

400-E=2E/3

E=240units

for firm b, MACb=MD

300-E=2E/3

E=180units

for firm c, MACc=MD

200-E=2E/3

E=120units

Each firms emits less than the uniform standard while firm c emits least so switching to its standard will maximize net social benefit.