Leaming Objective: 11 05 Explain the degree of flexsibility of different ypes of
ID: 1173921 • Letter: L
Question
Leaming Objective: 11 05 Explain the degree of flexsibility of different ypes of standards and their ability to spur investment in new technologies that can lower emission intensity Suppose the marginal abatement costs of a firm before a given technological improvement equal MAC1 and MAC2 is the marginal abatement cost curve the firm could expect to have after investing resources in R&D; to develop better treatment or recycling technology. So we have the following two possible marginal abatement cost functions and the marginal damage cost function for the firm of: MAC1 240-4 MAC2-180-3E MDC 2E Field Chapter 11 8. If the firm faced a standard of 40 units of emissions, what is the maximum amount of money it would be willing to spend on R&D; to achieve the lower MAC? A $200 B. $400 C. $600 D. $800Explanation / Answer
Solution :
We know the maximum amount of money the firm is willing to spend on R&D is the benefit earned (=cost reduction) by investing (or achieving MAC2)
Initially, the equilibrium occured at MAC1 = MDC
240 - 4E = 2E
On solving, we get E = 240/6 = 40
Now, the firm is facing the standard of 40 units of emissions. So, initially, the marginal abatement cost = 240 - 4*40 = $80 = MDC. So, cost = 80*40 = $3,200
With new Marginal abatement cost, MAC2 = 180 - 3E, if units of emissions = 40
MAC2 = 180 - 3*40 = $60
At this MAC2, MAC2 is not equal to MDC. At MDC = $60, E = 60/2 = 30 units of emissions. So, we can say that at cost of $60, firm faces an abatement of 40 units of emissions, though it requires to abate (it causes damage of) only 30 units of emissions. So, change/benefit in units emitted = 30 - 40 = -10 (10 less units of emissions)
Also, initially, at 40 units of emissions, we saw MAC1 = $80, but MAC2 = $60. So, abatement cost saved at that point = 60 - 80 = -$20
Thus, amount saved by R&D= 10*20 = $200. So, A. $200 is the correct answer.
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