Question

Suppose the marginal cost of abatement for a airborne pollutant is MC= 4X, where X is measured in tons, and the marginal benefit of abatement is 500 - X. The maximum abatement (reducing pollution to zero) is XMAX= 500.

a) Graph the MC and MB curves and show the efficienct level of abatement X* on the graph.

b) Calculate the efficient level of abatement X*

c) Suppose there is no abatement (X=0, which implies no actions are made to remove pollution and we all deal with it) Calculate the deadweight loss.

D) If the government restricted the total amount of pollution to 350 tons (so abatement would be 150), would that be efficient? If not, is it too much pollution or too little? Calculate the total waste in dollars relative to the efficient level.

Answer #1

a)

X | MC | MB |

0 | 0 | 500 |

10 | 40 | 490 |

20 | 80 | 480 |

30 | 120 | 470 |

40 | 160 | 460 |

50 | 200 | 450 |

60 | 240 | 440 |

70 | 280 | 430 |

80 | 320 | 420 |

90 | 360 | 410 |

100 | 400 | 400 |

110 | 440 | 390 |

120 | 480 | 380 |

130 | 520 | 370 |

140 | 560 | 360 |

150 | 600 | 350 |

160 | 640 | 340 |

b. The efficient level ox X is where MC=MR=400 and X =100

c. Deadweight loss = 0.5*(500-400)*100 = 5000

d. With the restriction of pollution to 350 tons, is an inefficient level which would lead to increased cost of 600, so the total waste in dollars which is an extra increased cost would be 250.

(c) The aggregate marginal cost function for this two-firm
industry is: MC = 3Q Suppose the marginal benefit of pollution
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abatement?
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