Suppose that the marginal damages to society from air pollution are MD=e-25, whe

Question

Suppose that the marginal damages to society from air pollution are MD=e-25, where e is the level of air pollution. Suppose also that the marginal cost of reducing the air pollution on the part of firms is MC=200-2e. a. Find the optimal level of pollution. Illustrate graphically b. Fine the net gain to society, assuming firms were initially not controlling emissions at all. c. What level of tax would achieve the optimal level of pollution? d. Suppose instead of a tax a standard is set so that the level of pollution is 10% below the efficient level. Calculate the cost to society.

Explanation / Answer

a. solve MD=MC for e then plot the two lines as function of e. b. 0.5*225*e, where e is the answer from part a. c. plug e into MC formula d. 0.99 of answer to b

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