A government study has concluded that the marginal benefits from controlling cow-induced methane production are given by MB = 100 – R where R represents the percentage reduction from unregulated levels. The marginal cost to farmers of methane reduction (through better cow feed) is given by MC = 20 + R a) What is the socially optimal level of methane reduction? [Hint: Let MB=MC] b) If the government were to adopt a methane fee that farmers must pay for each percent of methane they do not reduce, how should this fee be set to achieve the optimal level of R? {Hint: This fee will be reflected in the MC to the firm] c) Suppose there are two farmers in this market with differing costs of methane reduction. The first has marginal costs given by MC1 = 20 + 2/3 R1 whereas the second has marginal costs given by MC2 = 20 +2R2 Total methane reduction is the average from these two farms. If the government mandates that each farm reduce methane by the optimal percentage calculated in part a), what will the overall reduction be and what will this reduction cost (assuming there are no fixed costs to reducing methane)? [Total cost is given area under MC up to the required level.]
A government study has concluded that the marginal benefits from controlling cow-induced methane production are given by
MB = 100 – R
where R represents the percentage reduction from unregulated levels. The marginal cost to farmers of methane reduction (through better cow feed) is given by
MC = 20 + R
a) What is the socially optimal level of methane reduction? [Hint: Let MB=MC]
b) If the government were to adopt a methane fee that farmers must pay for each percent of methane they do not reduce, how should this fee be set to achieve the optimal level of R? {Hint: This fee will be reflected in the MC to the firm]
c) Suppose there are two farmers in this market with differing costs of methane reduction. The first has marginal costs given by
MC1 = 20 + 2/3 R1
whereas the second has marginal costs given by
MC2 = 20 +2R2
Total methane reduction is the average from these two farms. If the government mandates that each farm reduce methane by the optimal percentage calculated in part a), what will the overall reduction be and what will this reduction cost (assuming there are no fixed costs to reducing methane)? [Total cost is given area under MC up to the required level.]
d) Suppose, instead, that the government adopts the methane fee described in part b). What will be the total reduction in methane and what will this reduction cost?
e) Explain why c) part and part d) yield different results
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
