(d) Find the optimal tax per ton that achieves the desired total reduction. How much less do firms spend to abate pollution under this tax than they did in part (b) above? Ignore the tax expenditure. (e) Intuitively, explain why the total abatement cost across both firms is lower in part (d) than in part (b).
(d) Find the optimal tax per ton that achieves the desired total reduction. How much less do firms spend to abate pollution under this tax than they did in part (b) above? Ignore the tax expenditure. (e) Intuitively, explain why the total abatement cost across both firms is lower in part (d) than in part (b).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Just need help with part d and e. Not a, b, or c. Thank you.
Transcribed Image Text:Suppose there are
plants that release carbon dioxide emissions (CO₂) into air at
their current production levels. Each firm currently emits 75 tons per year, thus emitting 150
tons total. Local authorities have decided they would like to reduce annual CO₂ pollution to
100 tons per year (thus a 50 ton reduction).
The power plants have different marginal abatement costs given by the following equations:
MAC₁ = 2a1
1
MAC2 = 02
whereby a₁ and a2 correspond to the marginal abatement quantities chosen by firms 1 and 2
respectively.
(a) Plot the marginal abatement functions for each firm on separate graphs.
(b) Suppose the local authorities decide to impose a uniform reduction of pollution by both
power plants. In order to achieve the 50 unit reduction under this plan, both plants must
reduce their emissions (abate pollution) by 25 units each. Find how much this would cost
each firm and find the total cost of abatement under this uniform reduction policy.
(c) Suppose the regulator passed a carbon tax equal to $15 per ton. How much abatement
would firm 1 choose? Firm 2? How much would each firm spend on abatement and how
much would each firm pay in taxes? Is this tax too high or too low to achieve the desired
50 ton total reduction?
(d) Find the optimal tax per ton that achieves the desired total reduction. How much less do
firms spend to abate pollution under this tax than they did in part (b) above? Ignore the
tax expenditure.
(e) Intuitively, explain why the total abatement cost across both firms is lower in part (d)
than in part (b).
1
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