1. a. Under a strict command-and-control framework, suppose abatement standards are set equally across polluters. Assume the total abatement target is set at 30 units. Show the cost implications using three graphs, each of a different polluter with a unique MAC curve drawn to depict a low-cost abater, a moderate cost abater, and a high-cost abater. On each graph, identify the abatement level corresponding to a uniform standards approach, and show the level of MAC at that point and the area corresponding to TAC.
b. Now, refer directly to your model, and summarize what would happen qualitatively to the abatement levels of each firm if the equimarginal principle of optimality were used. Explain intuitively why this method would be cost-effective.
2. It is well documented that carbon monoxide (CO) emissions from combustible engines increase in colder climates. This implies that
damages are expected to be less severe in summer months than in winter. Nonetheless, air quality control authorities use a standard for CO
that is uniform throughout the year with no allowance for seasonal effects. Use this information and the following model to answer the questions:
MSB of CO abatement in winter = 350 - 0.5A,
MSB of CO abatement in summer = 140 - 0.2A,
MSC of CO abatement = 0.2A,
where A is the level of CO abatement.
a. Graph the MSB and MSC functions on the same diagram.
b. Assume the government sets a uniform standard for winter and summer at A = 500. Support or refute this policy based on the
criterion of allocative efficiency, using your model to explain your response. c. If you were in charge of setting policy for CO emissions, what
action would you recommend to ensure an allocatively efficient outcome across the two seasons?
3. Assume that two power plants, Firm 1 and Firm 2, release sulfur dioxide(SO2)in a small urban community that exceeds the emissions standard. To meet the standard, 30 units of SO2 must be abated in total. The two firms face the following abatement costs:
MAC1 = 16 + 0.5A1 MAC2 = 10 + 2.5A2,
where costs are measured in thousands of dollars.
a. Prove that a uniform standard will not meet the cost-effectiveness criterion. Use 1 graph to illustrate your answer.
b. Determine how the abatement levels should be reallocated across the two firms to minimize costs. Illustrate this answer using the
same graph you used in part (a).
4. Suppose that a chemical manufacturing plant is releasing nitrogen oxidesinto the air, and these emissions are associated with health and ecological damages. Economists have estimated the following marginal costs and benefits for the chemical market, where Q is monthly output in thousands of pounds and P is price per pound.
MSB = 50 - 0.4Q MSC = 2 + 0.4Q
MEB = 0 MEC = 0.2Q
a. Find the competitive equilibrium, QC and PC, and the efficient equilibrium, QE and PE. Graph your answer.
b. Find the dollar value of a product charge that would achieve an efficient solution.