Question

Regulators are considering controlling the emissions from two local power plants. The marginal benefits (the demands for emissions) derived by these plants from being able to produce a given quantity of emissions are 400 − 10A for the first plant and 400 − 8B for the second plant.

(a) Graph both of these marginal benefit curves, being careful to label your axes and intercepts. How much does each individual plant choose to emit in the absence of regulation?

(b) Find the aggregate marginal benefit of emissions (MBE) function. Add this function to your graph.

(c) Suppose the marginal damages from emissions are MCE = 4.5(A + B) = 4.5E. Add this

function to the graph. What is the efficient level of emissions?

(d) What is the efficient Pigouvian tax? If faced with the tax identified, how much will each firm choose to emit? Add the tax to your graph and clearly label the areas corresponding to total taxes paid by each firm.

Answer 1

graphs:

Area ABDC: taxes paid by firm a

ABFE: taxes paid by firm B