The operation of big ben\'s steel factory currently creates 110 tons of air poll
ID: 1192873 • Letter: T
Question
The operation of big ben's steel factory currently creates 110 tons of air polluion. to clean up the air, big ben's must incur a marginal cost expressed as MC1=1.0Q1, where Q1 is the ton of the air that are cleaned by big ben's (i.e., reduced pollution). The operation of sam's steel factory currenly creates 80 tons of air pollution. To clean up the air, Sam's must a marginal cost expressed as MC2=0.5Q2, where Q2 is the tons in the air that are cleaned by sam's (i.e., reduced pollution). Now, assume the government has decided that it does not want to have more than a combined total of 100 tons of air pollution. To achieve this goal the government considers alternatives polices.
A) First, if the government mandates that no firm is allowed to create more than 50 tons of air pollution, what will be the combined total cost for both firms to achieve this mandate (i.e., the costs incurred by Big Ben's plus the costs incurred by Sam's)
B) Instead, if the government changes its policy and gives both firms permits that allow each firm to pollute 50 tons, but then also gives the firms the ability to buy or sell these permits with the other firms, then:
a. how much clean air will Bin Ben's and Sam's each produce?
b. what will be the market equilibrium price of a permit?
c. what will be the combined total cost of cleaning the air that is incurred by Big Ben's anf Sam's (i.e., again achieving the goal of only 100 tons of total pollution)
C) Finally, if the government instead uses a tax (=t) on each unit of pollution created, then:
a. what should the unit tax (=t*) be in order to maximize the combined total costs (i.e., the costs incurred by Big Ben's plus the costs incurred by Sam's) for having at most only 100 total tons of pollution?
b. at this t* how much of the 100 tons of pollution will be created by Big Ben's and how much by Sam's?
Explanation / Answer
Big ben's steel factory
MC1=Q1, where Q1 is the ton of the air that are cleaned by big ben's (i.e., reduced pollution).
Total pollution- 110
Sam's steel factory
MC2=0.5Q2
Total pollution- 80
Total combined cost = $75
b. Market equilibrium price of permit will be $0.50 per unit.
c. Combined cost of abatement = $1(10) + $0.50(80) = $50
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