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Suppose a society has the following marginal abatement cost (MAC) and marginal damage (MD) functions MAC...

Suppose a society has the following marginal abatement cost (MAC) and marginal damage (MD) functions MAC = 140 – 4E MD = 3E Where E denotes the level of pollution.

A) What is the optimal level of pollution? Sketch the MAC and MD functions and show the optimal level of pollution in the diagram.

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Answer #1

Optimal level of pollution can be determined by setting

MAC=MD

i.e.

140-4E=3E

7E=140)

E=20 units (Optimal level of pollution)

E           MD          MAC      
0 0 140
10 30 100
20 60 60
30 90 20
35 105 0

(Optimal pollution level is shown by the point of intersection of MD and MAC curves.)

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