Question

Suppose a local policy group is trying to decide how much abatement to pursue. The estimated market marginal social benefits and market marginal abatement costs in dollars are expressed as follows, where A equals units of pollution abated: MSB = 200-4A

MAC_MKT = A

a. Assuming zero enforcement costs (MCE = 0) , what is the efficient level of pollution abatement?

b. What is the welfare cost of ignoring pollution (meaning that the policy group does not pursue any abatement)?

c. What is the efficient level of abatement if the marginal cost of enforcement (MCE) is 3A?

d. What is the welfare cost of ignoring pollution with the revised MCE (3A)?

Answer 1

The estimated market marginal social benefits is MSB=200-4A

The market marginal abatement costs is MAC_MKT=A

where, A = units of pollution abated

a. When MCE = 0, the efficient level of abatement would be where market marginal social benefits equals market marginal abatement costs i.e.

MSB = MAC_MKT

200-4A=A

200=5A

200/5=A

40=A

Therefore, 40 is the efficient level of pollution abatement.

b. The welfare cost of ignoring pollution would be 0 since the level of abatement would be 0 in this case.

c. If the marginal cost of enforcement (MCE) = 3A

Then, MAC= A+3A = 4A

Since, efficient level of pollution abatement is MSB = MAC

200-4A = 4A

200 = 8A

200/8 = A

25 = A

Therefore, 25 is the efficient level of abatement in case MCE = 3A