1) Two paper plants are polluting the bay outside of Lobsterville with gunk. The
ID: 329918 • Letter: 1
Question
1) Two paper plants are polluting the bay outside of Lobsterville with gunk. The authorities have decided that to protect the lobster fisheries, total gunk emissions must be reduced to 8 tons per day. Plant A has marginal emission reduction costs of 10-xa dollars per day, where xa is the level of pollution, and is currently emitting 10 tons. Plant B has marginal emission reduction costs of 10-1.5xb dollars per day, where xb is the level of pollution, and is currently emitting 5 tons. Thus, 15 tons are currently being emitted.
a. Sketch the marginal cost of emission reduction curves for both firms. For which firm is reducing emissions more expensive? Based on your answer, which firm will reduce pollution by a larger amount in an economically-efficient solution?
b.Suppose the government wants to restrict total pollution by 7 units; would it be efficient to have each plant reduce emissions units by 3.5 units? Explain your answer relates to the idea of “command and control” regulation.
c. Solve for the amount of emissions each firm should produce in an optimal solution.
d. What tax would need to be instituted in order to achieve the efficient level of emissions?
Explanation / Answer
Answer:
No it would not be efficient to have equal emission standards. This is ebecause Plant A has lower abatement costs, hence for abatement to be socially optimally, it should abate more than PLant B.
At optimum, MCA = MCB
10-xa = 10-2xb
xa = 2xb
Also, xa + xb = 6
So 2xb + xb = 6
xb = 2
xa = 2 x 2 = 4
Tax = 10 - xa = 10 - 4 = 6
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