Suppose that the government allocates the abatement responsibility uniformly, requiring each polluter to abate 10 units of pollution. Quantitatively assess the cost implications.
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.
Assuming a uniform standard of 10 units, MAC1 = 1.5(10) = $15 thousand, while MAC2 = $10 thousand. TAC1 = 10 + 0.75(10)2= $85 thousand and TAC2 = 5 + 0.5(10)2 = $55 thousand, for an overall total cost in the region of $140 thousand. Since the MACs are not equal at a 10-unit abatement level per firm, the method is not cost-effective. This is expected when a uniform standard is imposed across polluters.
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