Two electric utilities have different marginal abatement costs(MCA) for reducing sulfur dioxide emissions. They can each reducethese
Question:
Two electric utilities have different marginal abatement costs(MCA) for reducing sulfur dioxide emissions. They can each reducethese emissions with the following marginal (MCA) and total (TCA)abatement cost curves. Firm 1: TCA1 = 2.5 (A1) 2 MCA1 = 5A1 Firm 2:TCA2 = 5 (A2 )2 MCA2 = 10A2 Firm 1 would have an unconstrainedemission level of E1 Max =100 while Firm 2 is larger and would haveunconstrained emissions of E2 Max =150. A) The EPA believes thattotal emissions are excessive and wants to cut them from 250 tonsto 130 tons. Calculate and graph the cost minimizing allocation ofabatement activities for the two firms that will achieve the totaldesired abatement level A=120 tons B) Suppose that the EPA decidedto achieve the pollution reduction by requiring each firm to reducetheir emissions by 60 tons: A1 = A2 =60 tons. Calculate and show ona graph, the efficiency loss compared to the cost minimizingallocation (that is, the increase in total abatement cost) thatwould occur. C) Rather than use uniform performance standards likein part B, the EPA decides to use an emissions tax to achieve thedesired reduction of 120 tons. They set the tax per ton of sulfurdioxide emissions at $350/ton. Will this tax achieve their desiredlevel of total emissions? At what level should the tax be set toget 120 tons of emission reduction? D) Rather than use performancestandards or a tax, the EPA decides to establish a market inpollution rights. They set the supply of pollution permits at ES=130 (in order to achieve the desired reduction of 120 tons).Derive each firm's demand for pollution rights, the market demandcurve, and the equilibrium price. How much would each firm polluteand how much would they abate? Draw a graph of the marketequilibrium. E) The EPA conducts a study of the health benefitsfrom reducing sulfur emissions and finds they are constant at$300/ton. How should this information on the MSB of abatement beused? How should the EPA adjust its desired level of pollutionabatement?
Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez