Question

Problem 2: Suppose that the benefits and costs of water quality policy have been estimated as follows:

MSB = 40 – 0.8A MSC = 10 + 0.2A TSB = 40A – 0.4A2 TSC = 10A + 0.1A2,

where A is the percentage of pollution abatement and the benefits and costs are measured in thousands of dollars.

a. Determine the range of abatement within which policy achieves positive net benefits.

b. Find the efficient level of abatement.

Answer 1

a) The policy while achieve positive net benefits for the range of abatement where marginal social benefit is more than marginal social cost i.e MSB>MSC

= 40-0.8A>10+0.2A

= 40-10>0.2A+0.8A

= 30>1A

= A<30

For pollution abatement less than 30 the policy achieves positive net benefits.

B)

Efficient level of abatement is where marginal social benefit = Marginal social cost i.e MSB= MSC or the benefit from an additional abatement is equal to the cost of the imposing that abatement.

40-0.8A= 10+0.2A

30= 0.2A+0.8A

30= 1A

A= 30/1

A= 30

Efficient level of abatement A= 30