A town contains two firms, A and B, which emit a uniformly mixed pollutant into the air. Firm A’s marginal savings associated with emissions is MSA = 400−4eA and firm B has marginal savings MSB = 200 − eB, where eA and eB refer to the emissions of firms A and B respectively. Firm A is currently emitting 100 tons and firm B is currently emitting 150 tons. The local government wishes to reduce total emissions to e = 150 tons. The marginal damages resulting from the emissions are given by MD(e) = 100.

a) Draw the MS and MD functions in a graph with emissions in the x-axis.

b) What should be the level of abatement for each firm if the target is to be met at the lowest possible overall cost?

c) In a separate graph draw the marginal savings function for the town as a whole.

d) For the town as a whole, express marginal savings as a function of overall emissions e.

e) Show in a graph total benefit and total cost of abatement if the target of e = 150 tons is achieved cost-effectively.

f) Calculate the net benefit of abatement if the target of e = 150 tons is achieved cost-effectively.

g) Determine the net benefits of abatement if the target of e = 150 tons is achieved by making each firm abate an equal amount. Is this cost-effective? Why?

h) What is the efficient level of abatement? Calculate the net benefit if the efficient target is chosen.

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