1. Marginal Abatement Cost Curves There are two coal plants that generate electricity, firm 1 and firm 2 that emit 100 and 200 tons of CO₂ each year respectively when the price of pollution is zero (i.e., in the absence of any regulation). You are the head of the EPA, and after consulting with some environmental economists, you decide that the socially optimal amount of abatement in the electricity industry is a 100 tons of CO₂. The marginal abatement cost curves are given by the following, where Q₁and Q₂ are the amount of firm 1 and 2's abatement: MAC₁ = 10+ (1/2)Q₁ MAC₂ = Q₂ horizontal axis) [hint: recall that in a MAC diagram, Q₂ increases as you move to the left on the a. Historically, the EPA has used "command-and-control" methods of reducing pollution. One of your staff members, Mike, says that it is efficient for both firms to each reduce their pollution by 50 tons. Determine if you agree or disagree with Mike, and explain your intuition. b. In a cap and trade system, determine how much firm 1 and firm 2 abate their pollution c. In a cap and trade system, determine the price of a 1 ton of CO₂ pollution permit. How many pollution permits would you have to issue? d. Using marginal analysis, explain intuitively why firm 1 would want to abate at least th first unit of abatement (i.e., go from polluting freely, to reducing its pollution by one unit).
1. Marginal Abatement Cost Curves There are two coal plants that generate electricity, firm 1 and firm 2 that emit 100 and 200 tons of CO₂ each year respectively when the price of pollution is zero (i.e., in the absence of any regulation). You are the head of the EPA, and after consulting with some environmental economists, you decide that the socially optimal amount of abatement in the electricity industry is a 100 tons of CO₂. The marginal abatement cost curves are given by the following, where Q₁and Q₂ are the amount of firm 1 and 2's abatement: MAC₁ = 10+ (1/2)Q₁ MAC₂ = Q₂ horizontal axis) [hint: recall that in a MAC diagram, Q₂ increases as you move to the left on the a. Historically, the EPA has used "command-and-control" methods of reducing pollution. One of your staff members, Mike, says that it is efficient for both firms to each reduce their pollution by 50 tons. Determine if you agree or disagree with Mike, and explain your intuition. b. In a cap and trade system, determine how much firm 1 and firm 2 abate their pollution c. In a cap and trade system, determine the price of a 1 ton of CO₂ pollution permit. How many pollution permits would you have to issue? d. Using marginal analysis, explain intuitively why firm 1 would want to abate at least th first unit of abatement (i.e., go from polluting freely, to reducing its pollution by one unit).
Chapter1: Making Economics Decisions
Section: Chapter Questions
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1. Marginal Abatement Cost Curves
There are two coal plants that generate electricity, firm 1 and firm 2 that emit 100 and 200 tons
of CO2 each year respectively when the price of pollution is zero (i.e., in the absence of any
regulation). You are the head of the EPA, and after consulting with some environmental
economists, you decide that the socially optimal amount of abatement in the electricity
industry is a 100 tons of CO2. The marginal abatement cost curves are given by the following,
where Qjand Q, are the amount of firm 1 and 2's abatement:
MAC1 = 10+ (1/2)Q1
MAC2 = Q2
horizontal axis)
%3D
[hint: recall that in a MAC diagram, Q2 increases as you move to the left on the
a. Historically, the EPA has used "command-and-control" methods of reducing pollution.
One of your staff members, Mike, says that it is efficient for both firms to each reduce
their pollution by 50 tons. Determine if you agree or disagree with Mike, and explain
your intuition.
b. In a cap and trade system, determine how much firm 1 and firm 2 abate their pollution.
c. In a cap and trade system, determine the price of a 1 ton of CO2 pollution permit. How
many pollution permits would you have to issue?
d. Using marginal analysis, explain intuitively why firm 1 would want to abate at least the
first unit of abatement (i.e., go from polluting freely, to reducing its pollution by one
unit).
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