Now, assume that the government institutes an emission fee of $16 thousand per unit of pollution. How many units of pollution would each polluter abate? Is the $16 thousand fee a cost-effective strategy for meeting the standard? Explain.
Assume that there are two firms, each emitting 20 units of pollutants into the environment, for a total of 40 units in their region. The government sets an aggregate abatement standard (AST) of 20 units. The polluters' cost functions are as follows, where the dollar values are in thousands:
Polluter 1: TAC1 = 10 + 0.75(A1)2, Polluter 2: TAC2 = 5 + 0.5(A2)2, MAC1 = 1.5A1, MAC2 = A2.
Faced with a $16 thousand pollution charge, each polluter will abate as long as its MAC is less than $16 thousand and pay the fee when the opposite condition holds. Hence, polluter 1 will abate up to the point where MAC1 equals $16 thousand. Algebraically, this is found as follows:
MAC1 = 16
1.5(A1) = 16, which implies A1 = 10.67 units.
Analogously, polluter 2 abates up to the point where MAC2 equals $16 thousand, found as:
MAC2 = 16
A2 = 16 units
Notice that although the pollution charge brings about equal MACs across polluters, the total abatement level for the region is 26.67 units, which is higher than what is required. This means that the fee is set too high to meet the standard and too manyresources are being allocated to pollution abatement.Total costs of abatement are: TAC1 = 10 + 0.75(10.67)2 =$95.39 thousand and TAC2= 5 + 0.5(16)2= $133 thousand, or $228.39 thousandfor the entire region. This result underscores the difficulty in setting the appropriate level of a pollution charge to meet a given abatement level.
You might also like to view...
One point on a PPF shows production levels at 50 tons of coffee and 100 tons of bananas. Remaining on the PPF, an increase of banana production to 140 tons shows coffee production at 30 tons
Still remaining on the PPF, coffee production at 10 tons allows banana production at 160 tons. The opportunity cost of a ton of bananas is A) constant because coffee production decreased by the same amount each time. B) decreasing, since the increase in banana production is less at each point considered. C) 16 to 1, that is every 1 ton of coffee given up will result in 16 more tons of bananas. D) increasing from 1/2 ton of coffee per ton of bananas to 1 ton of coffee per ton of bananas.
Unlike firms that sell stock in financial markets, which are known as ________ firms, companies which do not sell stock in financial markets are known as ________ firms
A) public; private B) corporate; proprietary C) open; closed D) stock market; bond market
The exchange rate is
a. the price of foreign exchange determined by the interaction of supply and demand b. an interest rate determined by the interaction of supply and demand c. fixed by each government separately d. always fixed for any two currencies by the two nations involved, regardless of any agreements made with other nations e. fixed by GATT
Old Navy has a discount store in a rundown neighborhood and charges about half what they charge for the same merchandise in a more fashionable neighborhood. The best explanation for why they charge less in the rundown neighborhood is that
A. they pay less rent. B. their customers can't afford to pay any more. C. they don't have to bother advertising. D. they are maximizing their profits at the prices they are charging.