Suppose a power generating plant emits particulates that damage crops and affect human health. The relationship between emissions and environmental damage is represented by the marginal damage function,MD=9e where e represents tons of emissions per month.The cost to the firm (and society) of eliminating emissions is represented the marginal abatement cost function,MAC=108.5 - 6.5eBoth MD and MAC are dollar costs per month.If the power generating firm were allowed to ignore the social cost of its emissions, what would be the firm’s monthly emission level?Calculate the socially efficient level of pollution.If the emissions calculated in part B is a level found to shorten some people’s lives, could it still be considered socially efficient?Suppose the EPA set an emission standard at the socially efficient level calculated in part B. Calculate the cost to the firm of achieving this standard.Suppose that instead of a standard, the EPA charged an emissions tax. The tax is set at the point that would induce the firm to produce at the efficient level. What tax rate would it set?Calculate the total cost to the firm if efficiency is reached through the use of an emissions tax. Explain why it would be less costly for the firm if it were regulated by an emissions standard as opposed to a tax.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose a power generating plant emits particulates that damage crops and affect human health. The relationship between emissions and environmental damage is represented by the marginal damage function,

MD=9e where e represents tons of emissions per month.

The cost to the firm (and society) of eliminating emissions is represented the marginal abatement cost function,

MAC=108.5 - 6.5e

Both MD and MAC are dollar costs per month.

If the power generating firm were allowed to ignore the social cost of its emissions, what would be the firm’s monthly emission level?
Calculate the socially efficient level of pollution.
If the emissions calculated in part B is a level found to shorten some people’s lives, could it still be considered socially efficient?
Suppose the EPA set an emission standard at the socially efficient level calculated in part B. Calculate the cost to the firm of achieving this standard.
Suppose that instead of a standard, the EPA charged an emissions tax. The tax is set at the point that would induce the firm to produce at the efficient level. What tax rate would it set?
Calculate the total cost to the firm if efficiency is reached through the use of an emissions tax. Explain why it would be less costly for the firm if it were regulated by an emissions standard as opposed to a tax.

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