A uniform abatement standard (AST) is also being considered across the State of California of 300 units. Use the criterion of allocative efficiency to support or refute this alternative.

Question

Los Angeles County has the worst urban air quality across all major metropolitan areas in the United States. Automobile emissions contribute significantly to this problem. Assume the California Air Resources Board is consideringwhether to set a uniform emission standard or a regionally-based emission standard, where one standard is set for Los Angeles County and another for the rest of the state.
Marginal social benefits (MSB) and marginal social costs (MSC) for the two regions have been estimated as follows:
MSBabatement in LA County = 500 ?0.75A
MSBabatement in the rest of California = 150 ? 0.25A
MSCabatementin all of California = 0.5A,
where A is the level of abatement of automobile emissions, and MSB and MSC are in millions of dollars.

Answer 1

Under a uniform automobile emission abatement standard of AST = 300, neither region would be regulated at an efficient abatement level. In fact, comparing AST to the efficient levels found in part (a), we know that this standard would underregulate Los Angeles County and overregulate the remainder of the state.
This assertion also can be shown numerically. When the abatement level is 300, MSB in LA County would equal 500 – 0.75(300) = $275 million, and the MSB in the remainder of Californiawould equal 150 – 0.25(300) = $75 million, but MSC would equal 0.5(300) = $150 million. Hence, with AST= 300, MSB>MSCin LA county, suggesting underregulation, and MSB