1. Some manufacturing processes generate pollution that is a health and environm

Question

1. Some manufacturing processes generate pollution that is a health and environmental hazard. The government wants to reduce the amount of pollution reaching the atmosphere. There are currently only two firms producing goods that generate the pollution. Use the following graphs to answer the questions below (Note: MAC-Marginal Abatement Cost). MAC 10 MAC Tax $7.50 ton 250 Firm 1 Pollution Abated (tons) Firm 2 Pollution Abated (tons) (2 points) If the government requires each firm to reduce its pollution by 250 tons, what is the total cost for each firm? a. Firm 2: Firm 1: b. (3 points) If, instead of requiring both firms to reduce pollution by the same amount, the government imposed a tax of $7.50 per ton of pollution, how much would each firm reduce their pollution and what is total pollution reduction? (Hint: each firm may reduce pollution and/or pay the tax, whichever costs less) Total: Firm I: Firm 2: (2 points) According to the graphs, when the tax is $7.50 per ton, what is the marginal abatement cost (MAC) for each firm at the level of pollution reduction that they choose? Finn 2:- c. Firm 1:

Explanation / Answer

a) The total abatement cost (TAC) of each firm is represented by the area of the triangle below the MAC curve up to the desired level of pollution reduction.

For each firm, the area is : ½ * base (units of pollution reduced or abated) * height (Cost in $)

For firm 1: ½ * (250) * (5) = $ 625.

For firm 2: ½ * (250) * (10) = $ 1250

Therefore Total cost of abatement for each firm is:

Firm 1: $625 and Firm 2: $1250.

b) When a tax of $7.50 is imposed, each firm will opt for the cheaper option of either paying tax and polluting or reducing pollution. Each firm will be indifferent to abating pollution or paying tax for pollution at the point where MAC is equal to per unit of tax. Below this point, since MAC is less than tax, firms abate pollution and above that point since MAC is greater than tax, firms continue to pollute and pay taxes for it.

The optimal point for Firm 1 is at 400 tons of pollution where per unit tax is equal to MAC. Thus firm 1 abates up to 400 tons of pollution. Beyond that, firm 1 pays taxes.

The optimal point for Firm 2 is at 100 tons of pollution where per unit tax is equal to MAC. Thus firm 2 abates up to 100 tons of pollution. Beyond that, firm 2 pays taxes.

Therefore, the abated or reduced pollution is as follows:

Firm 1: 400 tons       Firm 2: 100 tons        Total: 500 tons

c) From the same logic as presented above, at the tax of $7.50 per ton, the MAC of each firm at their respective chosen levels of abatement (Firm 1: 400 tons and Firm 2: 100 tons), is equal to the per unit tax imposed.

Thus, MACs are as follows:

Firm 1: $7.50 for abating 400 tons of pollution

Firm 2: $7.50 for abating 100 tons of pollution

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