Graph the MSB and MSC functions on the same diagram. Show the regionally-based set of standards (ALA and AREMAINDER) that should be recommended to achieve allocative efficiency in each region. Find the numerical value of each standard.

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

The diagram should be as shown below, where the two MSB curves representingeach of the geographically-defined regions and one MSC curve. For each region, efficient abatement standards are foundwhere MSC equals the respective MSB function.



Using algebra, the solutions are:

For LA county: 500 – 0.75A = 0.5A

1.25A = 500

?ALA = 400

For the remainder of California:

150 – 0.25A = 0.5A

0.75A = 15

?AREMAINDER = 200