Question

The marginal damages associated with an air pollutant are MD = (3/5)E. A single Firm is the sole source of the pollutant. The marginal abatement costs of the Firm are MAC = 200-(2/5)E. (a) Determine the socially optimal level of emissions for the Firm and describe both (i) an Emission Standard, E^ and (ii) an Emission Tax, tE that will bring about the social optimum. (b) Suppose that if the Firm undertakes research and development there is a very high likelihood that a new process/technology will permit the Firm to lower emissions and lower the cost of abating emissions. The marginal abatement costs with the new technology in place will be MAC’ = 180-(2/5)E. If the regulatory regime is an Emission Standard, E^ (as specified in a:(i) above), determine how much the Firm might be willing to invest in order to develop the new process. (c) If the regulatory regime is an Emission Tax, tE (as specified in a:(ii) above), determine how much the Firm might be willing to invest in order to develop the new process. Explain why there might be a difference under the two regimes if they both achieve the same (socially optimal) level of emissions. (d) Suppose that the abatement costs are MAC = 200-(2/5)E (no other abatement technology exists). MDest = (3/5)E is the regulator’s estimate of the marginal damages function. Calculate the Social loss that results from (i) an Emission Standard, E^ and (ii) an Emission Tax, tE that are based on MDest when the true marginal damages are in fact MDtrue = (3/4)E

Answer 1