23. (25 points) A local factory emits sulfur dioxide into the environment when burning coal, leading...

   

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23. (25 points) A local factory emits sulfur dioxide into the environment when burning coal, leading to acid rain. Suppose that the factory's marginal cost of pollution abatement is uncertain, but the expected marginal cost is given by the equation EMC = 4A. Economists working for the EPA estimate that the marginal benefit derived from pol lution abatement is given by the equation MB - 500-A. The no-pollution level of abatement is Ao 150. (a) What is the expected efficient level of pollution abatement? (b) The EPA hires you to find a constant tax that would lead to the expected efficient level of pollution abatement. What tax would you suggest? How much of a fine is the firm expected to pay? (c) Redraw the figure below, and use it to illustrate your findings graphically. You do not need to draw your graph to scale, but your graph should include... 1. The expected marginal cost line (EMC) 2. The marginal benefit line (MB) 3. The expected efficient outcome (4*) 4. The tax (T) 5. The area of the total fine (shade this area) 6. The no pollution outcome (Ao) 0 pollution abatement Due to an unexpected reduction in the supply of clean coal, the firm's actual marginal cost of pollution abatement rises to MC = 4A + 100. (d) How much pollution abatement is there under the tax that you found in part (b)? What fine would the firm pay under that tax? (e) Albert the activist claims that it is efficient for the EPA to set a standard such that there's no pollution because a clean environment is priceless. Do you agree that no pollution is efficient? If so, why? If not, what is the efficient outcome? (f) The EPA buys into Albert's claim and asks you to implement the tax that leads to the no pollution outcome. Given the firm's actual cost, what tax would you set? How much of a fine would the firm pay? 23. (25 points) A local factory emits sulfur dioxide into the environment when burning coal, leading to acid rain. Suppose that the factory's marginal cost of pollution abatement is uncertain, but the expected marginal cost is given by the equation EMC = 4A. Economists working for the EPA estimate that the marginal benefit derived from pol lution abatement is given by the equation MB - 500-A. The no-pollution level of abatement is Ao 150. (a) What is the expected efficient level of pollution abatement? (b) The EPA hires you to find a constant tax that would lead to the expected efficient level of pollution abatement. What tax would you suggest? How much of a fine is the firm expected to pay? (c) Redraw the figure below, and use it to illustrate your findings graphically. You do not need to draw your graph to scale, but your graph should include... 1. The expected marginal cost line (EMC) 2. The marginal benefit line (MB) 3. The expected efficient outcome (4*) 4. The tax (T) 5. The area of the total fine (shade this area) 6. The no pollution outcome (Ao) 0 pollution abatement Due to an unexpected reduction in the supply of clean coal, the firm's actual marginal cost of pollution abatement rises to MC = 4A + 100. (d) How much pollution abatement is there under the tax that you found in part (b)? What fine would the firm pay under that tax? (e) Albert the activist claims that it is efficient for the EPA to set a standard such that there's no pollution because a clean environment is priceless. Do you agree that no pollution is efficient? If so, why? If not, what is the efficient outcome? (f) The EPA buys into Albert's claim and asks you to implement the tax that leads to the no pollution outcome. Given the firm's actual cost, what tax would you set? How much of a fine would the firm pay?

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a To find the expected efficient level of pollution abatement set the expected marginal cost of abat... View the full answer