Consider a polluting industry consisting with two firms 1 and 2. The marginal abatement cost (MAC) curves are functions of abatement quantity X (in tons) and are as follows: MAC1 = X1 MAC2 = 3X2 In words, the marginal abatement cost is X1 dollars for firm 1 and 3X2 dollars for firm 

2. Without any regulation, each company emits 100 tons of pollutants (i.e., 200 tons in total). Suppose that economists have found that the marginal benefit curve and the industry marginal abatement cost curve intersect at the total abatement quantity of 100 tons (namely, X1+X2=100). 

a) Suppose the government directs each company to reduce emissions by 50 tons ("Uniform Standard"). What would be the marginal abatement cost for each company at this specified level of abatement? 

b) What is the socially optimal distribution of abatement quantities between firms? 

c) What is the dead weight loss under the uniform standard? 

d) The government considers an emission tax of $30 per ton of pollutants instead. What level of abatement can be anticipated under this taxation scheme? (X1+X2)? 

e) Calculate the socially optimal tax rate per ton of pollutants emitted. 

f) What is the change in the social welfare under the socially optimal emission tax in comparison to the uniform standard policy? 

g) Calculate the total cost of compliance, which captures both the abatement cost and the tax payment, for each firm when operating under the socially optimal emission tax. 

h) Suppose the government considers abatement subsidy due to political opposition against the emission tax. How much abatement is achieved under $90/ton abatement subsidy?

 i) Now, suppose that an abatement subsidy is designed such that it achieves a socially optimal level of abatement. What is the total cost of compliance (namely, the sum of abatement cost and subsidy income) for each firm? 

 j) Suppose MAC1 remains the same but MAC2 has changed to 4X2. Calculate the welfare gains from switching to a market-based instrument (from a uniform standard). Is it larger or smaller than the 3X2 case or not? What is the intuition?

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Answer At the specified level of abatement where each company is directed to reduce emissions by 50 tons the marginal abatement cost MAC for each comp... View the full answer