Question

3A. You work for the state environmental office and have been told that you are now in charge of determining the optimal amount of pollution allowed from powerplants in the area. You recognize that emissions from this powerplant causes damage to the environment, but that it is also costly to reduce the number of emissions due to reduced production of the plant. After doing some research you find that the Marginal Damage Cost (MDC) and Marginal Abatement Cost (MAC) can be represented by the following equations:

MDC = 4e and MAC = 180 – 2e

3B. Using these equations, what is the level of unregulated pollution for the firm (the maximum number of emissions)?

3C. sing the information from 3B, what is the total cost of pollution when the market is unregulated?

3E. Using the information from 3A, what are the total abatement costs for this firm at the optimal amount of pollution?

3D. Using the information from 3A, what is the optimal amount of pollution emitted by this firm?

Answer 1

3B)

In absence of any regulation,

MAC=0

180-2e=0

e=90 (Unregulated pollution)

3C)

Total Cost of pollution (TCP)=Damage caused

3D)

Optimal level of pollution can be determined by setting MD=MAC

4e=180-2e

6e=180

e=30 (optimal pollution level)

3E)

New emission=Unregulated pollution-abatement=90-a

MAC=180-2e=180-2*(90-a)=2a

Pollution is reduced from 90 units to 30 units. So, abatement is 60 units.

Total cost of abatement is given as