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.
Marginal cost of pollution is the additional cost inflicted on the society by producing one more unit of a good which in the process of production generates pollution. For examplethe the cost (to the people in the neighbourhood) of washing clothes more frequently because of dust and the cost of getting medical treatment for sickness arising out of dust, carbon and other toxic gases relaes in the air by a new fleet of diesel operated cement carrying open trucks operating in a neighbourhood is the marginal cost of air pollution suffered by the society.