Question

(c) The aggregate marginal cost function for this two-firm industry is: MC = 3Q Suppose the marginal benefit of pollution control is given by: MB = 35 − 0.5Q What is the efficient level of abatement?

(d) What is the relationship between cost-effectiveness and efficiency? (e) What pollution tax would yield the efficient level of abatement you found in part (c)? If the pollution charge is levied on all units of emissions, how much revenue would the government receive?

(f) If instead the government wanted to use a cap-and-trade scheme to achieve the same goal, how many permits should the government issue? In equilibrium, what would be the price of a permit? If all of the permits were auctioned, how much revenue would be raised for the government?

(g) Suppose now that there is considerable uncertainty surrounding the costs of pollution abatement. In terms of our model, take this to mean that the aggregate marginal cost function in part (c) represents expected marginal costs. Actual costs could be much higher or lower. Assume there is no uncertainty regarding marginal benefits. In this situation, would a pollution tax or a system of tradable permits be more efficient?

Answer 1

c) The marginal cost, MC= 3Q

Marginal Benefit = 35-0.5Q

Effeicent level of abatement = MC=MB

= 3Q=35-0.5Q

=3Q+0.5Q = 35

= 3.5Q =35

Q= 35/3.5 = 10

The efficient level of abatement is 10 units.

d) Cost-effectiveness is the financial validity of a firm. Depending on the industry, It can be considered as the effectiveness of the outcomes achieved. Whereas cost efficiency is a state in which the methods and inputs are used to produce a maximum outcome. It means achieving the goals with minimal resources. Both cost-effectiveness and cost efficiency is related and goes hand in hand. In order to have cost efficectivess in the production process cost efficiency has to be attained.