Question

Suppose that the Marginal Abatement Cost function and the Marginal Damage function for an industry are given as follows:

MAC = 48 – 0.4e MD = 0.35e

For simplicity here, we are assuming that they are linear.

a. Graph the MAC and MD curves for this industry. Make sure you are marking out any and all relevant axis intercepts.

b. Suppose that the government want to impose a standard limiting the emissions to the efficient level.

i. At what value should this standard be imposed? Explain your answer.

ii. At this standard, what is the dollar value of the total damages to society? How did you find this value?

iii. At the standard, what is the total dollar value of the reduction in damages to society?

iv. At this standard, what is the dollar value of total compliance cost incurred by firms? How did you find this value?

Answer 1

Red colour : MAC curve

Blue colour: MD curve