1. The equimarginal principle says that if and only if then the policy must be c

Question

1. The equimarginal principle says that if and only if then the policy must be cost effective. (CIRCLE THE BEST ANSWER) (A) the cost of the first unit of abatement is equal across firms (B) the cost of the last unit of abatement is equal across firms (C) the total abatement cost is equal across firms (D) the units of abatement are equal across firms 2. A social planner can get abatement from firms a, b, and c. MAC, = 4A,, MAG = 6Aby and MAC, = 12A, (a) On the graph below, sketch and label MACa, MACb, and MACe. Your graph does not need to be mathematically exact, but it should show the relative difference in the slopes of these lines correctly. (b) On the same graph, sketch the aggregate marginal abatement cost MACagg. (c) Write down the equation for MACg in terms of aggregate abatement Aag2). It may helpful to use the graph above as a visual guide to what you should expect to find. HINT: You will need to rearrange some equations

Explanation / Answer

1. B) the cost of the last unit of abatement is equal across firms

For achieving cost efficiency the marginal cost of the last unit of abatement should be equal across all firms. If the marginal cost of the last unit is higher in any firm it will not give rise efficient allocation .

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