Question

A polluter with MAC= 120 -3E faces an emission standard set at E= 30 units. If its marginal abatement cost function shifts down to MAC'= 99- 3E due to adoption of a new technology, then what is the amount of cost-savings achieved by the polluter from adopting the new technology? What is the maximum amount the polluter is likely to pay for the new technology?

Answer 1

In case of initial technology,

MAC=120-3E

Set MAC to determine the level of emissions

120-3E=0

E=40

Regulated emission level is 30 units. So, total cost of reducing emissions

Now take the case of new technology

MAC=99-3E

Set MAC to determine the level of emissions

99-3E=0

E=33

Regulated emission level is 30 units. So, total cost of reducing emissions

i)

Cost savings=150-13.50=136.50

ii)

Maximum willingness to pay for technology=Cost savings=136.50