Suppose there are two firms in the world with marginal costs of abatement given by: MC^ = X 4. MC® = 3X Each firm is emitting 3 tons of CO2 initially, for a total of 6 tons. Suppose the marginal benefit curve is vertical (a threshold effect) at X = 4. This implies X*=4. a) Suppose the government decides that the firms should split the burden, so each one will do 2 units of abatement. What is the total cost to firm A, firm B, and the two together? b) Apply the equimarginal principle. What is the cheapest way to reach X* (i.e. how much abatement do A and B do)?

Suppose there are two firms in the world with marginal costs of abatement given by: MC^ = X 4. MC® = 3X Each firm is emitting 3 tons of CO2 initially, for a total of 6 tons. Suppose the marginal benefit curve is vertical (a threshold effect) at X = 4. This implies X=4. a) Suppose the government decides that the firms should split the burden, so each one will do 2 units of abatement. What is the total cost to firm A, firm B, and the two together? b) Apply the equimarginal principle. What is the cheapest way to reach X (i.e. how much abatement do A and B do)?

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

Suppose there are two firms in the world with marginal costs of abatement given by:
MC^ = X
4.
MC® = 3X
Each firm is emitting 3 tons of CO2 initially, for a total of 6 tons.
Suppose the marginal benefit curve is vertical (a threshold effect) at X = 4. This implies X*=4.
a)
Suppose the government decides that the firms should split the burden, so each one
will do 2 units of abatement. What is the total cost to firm A, firm B, and the two together?
b)
Apply the equimarginal principle.
What is the cheapest way to reach X* (i.e. how much abatement do A and B do)?

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