Question

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.

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.)