Answered: Firms in a polluting industry can be…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Firms in a polluting industry can be classified in two groups: newer firms with a cleaner technology that can abate pollution at a lower marginal cost M CLA L = (1/2) aL and older firms with dirtier M CAH = aH , where ai is the level of abatement undertaken by firms of type i = L,H. The social marginal benefit of abating pollution from this particular industry is MBA = 120 - A, where A is the aggregate level of abatement in that industry:

1. What Pigouvian tax t will implement the efficient allocation (aL; aH )? Is the resulting allocation an efficient allocation? What is the government’s tax revenue?

2. Suppose that in order to avoid the costly obtention of disaggregate information about individual firms cost, the government just implements a uniform standard aui = A*/2. Is this allocation efficient? If not, what is the deadweight loss?

What Pigouvian tax t will implement the efficient allocation (ai, a4)?
Is the resulting allocation an efficient allocation? What is the gov-
*
ernment's tax revenue?
Suppose that in order to avoid the costly obtention of disaggregate
information about individual firms' costs, the government just im-
plements a uniform standard af = A*/2. Is this allocation efficient?
If not, what is the deadweight loss?

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