Assume you are an analyst assessing national costs of mercury abatement (A). Your staff has estimated the marginal social cost of abatement to be MSC = 0.8A and the marginal abatement cost across all polluters to be MACmkt = 0.65A, where A is measured in percent, and marginal costs are in millions of dollars. Based on these estimates, what must be the equation for the government’s MCE? Interpret your equation.
What will be an ideal response?
Since the MSC is the sum of the MCE and MACmkt, then the MCE is found as MCE = MSC – MACmkt. So, in this case, MCE = 0.8A – 0.65A, or MCE = 0.15A.
In general, the MCE equation represents the additional costs incurred at all levels of government to monitor and enforce polluters’ abatement activities. The specific equation in this case, MCE = 0.15A, means that for every additional 1 percent of mercury abated, the marginal cost of enforcement increases by $0.15 million, or $150,000.
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