The following table shows the marginal abatement costs of each of two sources of

Question

The following table shows the marginal abatement costs of each of two sources of pollution.

Emission Source 1 (tons/week) Marginal Abatement Costs Source 1 Emission Source 2 (tons/week) Marginal Abatement Costs Source

12 0 12 0

11 1 11 2

10 2 10 4

9 3 9 6

8 4 8 10

7 5 7 14

6 6 6 20

5 8 5 25

4 10 4 31

3 14 3 38

2 24 2 58

1 38 1 94

0 70 0 160

Suppose that initially there is no regulation, and that each plant emits 12 tons/week, for a total of 24 tons/week. Now assume the EPA wants to reduce total emissions to 18 tons/week.

a. Suppose the EPA allocates the total reduction evenly between the two sources. That is, each will reduce its emissions to 9 tons/week. Is this the cost-effective way to achieve the goal of 18 tons/week? Why? If not, which source should be allowed to emit more and which less?

b. What is the cost-effective allocation of emissions that satisfies the goal of a total of 18 tons/week?

Explanation / Answer

Answers a- The suggestion for reduction of emission evenly between two sources is not cost effective at all, since it will led to creating infrastructure at two separate places and inccur double the cost of creating system and processes at one place. It is also apparent from table that the cost of reducing emission varies greatly in two systems and thus it will result in cumulative cost incurred on both the sources. Source 2 should be allowed to be emit less as cost incurred on reducing emission from it is very low. If we go through the table it is clear that the emission level to 3 cost the marginal incremental cost of 6 only which is very low then source 1.

b- the cost effective allocation of emission for achieving the goals of 18 tons/week is 6 dollors which can be used to reduce emission from source 2.

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