The following table describes the marginal benefit from generating particulate m

Question

The following table describes the marginal benefit from generating particulate matter pollution for three countries: US, Canada, and Mexico. It also describes the marginal cost, MC_i,j, inflicted on country j by a unit of emissions produced in country i. Because of proximity and wind patterns, the damages inflicted on a country by particulate matter emissions do depend on where those emissions are produced. Does particulate matter, as described in the table above, exhibit the trait we call "perfect mixing" in the atmosphere? (Just say Y/N and briefly state why) How much emissions would each country produce if each pursued a unilateral policy: How much emissions would each country produce if all three entered into a cooperative agreement?

Explanation / Answer

It is a problem on air pollution. Three countries US, Canada and Mexico are emmiiting air pollution. This poluution is not only affecting their own country, but also there is external effect of Air pollution on other countrys environment. Marginal cost and marginal benefit data are given in the problem.

First consider Mexico. It is enjoying marginal benefit (MBUS) of 80 units. It has marginal cost of 20 units in its own country (MCUSUS). It has external effect of 10 unit in Canada (MCCUS) and 10 unit in Maxico (MCMUS). Thus total marginal cost of pollution from US is 20+10+10=40 unit. Thus Mexico has net benefit of 80-40=40 units

Next consider Canada. Its marginal benefit (MBC) is 60 units. Marginal cost in US is MCUSC=10, Marginal cost in Canada is MCCC is 20 units and Marginal cost of Canada in Maxico is MCMC =5 units. So total marginal cost of emmission is 10+20+5=35 units.Thus net benefit of Canada is 60-35=25 units.

Finally consider Mexico. Its total marginal benefit is MBM=100 unit. It has marginal cost of 10 units in US (MCUSM). Marginal cost in Canada (MCCM) is 5 units and in its own country marginal cost (MCMM) is 20 units. Thus total marginal cost is- 10+5+20=35 units. So net marginal benefit is 100-35=65 units

Now compare the situations.

1. Mexico is getting highest benefit of 100 unit and has least marginal cost of 35 units.

2. US is providing less benefits of 80 units but emmitting more marginal cost of 40 units.

3. Canada has lowest benefit of 60 units and marginal cost of 35 units.

4. Each country is emitting equal MC in their own country of 20 units. But emmission in other countries are different.

Thus it can be concluded that perfect mixing in the atmosphere is not observed. Answer is No (N)

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Answer (b):

If there is unilateral policy in emmission, then each country will emmit equal degree of pollution per unit of benefit. Total benefit of three countries is 80+60+100=240. Total marginal cost is 40+35+35=110. Thus marginal cost per unit of benefit is 110/240=0.458. So MC per unit of benefit is 0.458. It is unilateral policy.

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Answer C:

Each country should produce emmission according to their beefits. Thus Emmission produced by

1. US= 80 x (11/24) = 36.67 units

2. Canada = 60 x (11/24)= 27.5 units

3. Mexico = 100 x (11/24) = 45.83 units.

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