Question

Consider a good for which production generates external costs. Let the marginal external cost function be MEC=aE, where a is 8, and E the quantity of emissions. The pollution can be abated at a cost. Let the marginal cost of abatement function be MCA=B-cE, where B is 26 and c is 3.

a) Find the socially optimal level of emissions, and the optimal value of abatement costs and external costs.

b) If an emission fee were levied on producers, what would be the deadweight social loss associated with setting the fee at 90% of the correct value?

c) If an emission standard were enforced, what would be the deadweight social loss associated with setting the standard at 110% of the correct value?

Answer 1

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