Question

3. Suppose that the Marginal Abatement Cost function and the Marginal Damage function for an industry are given as follows (they should look familiar...): MAC = 48 – 0.4e MD = 0.35e For simplicity here, we are assuming that they are linear. a. Graph the MAC and MD curves for this industry. Make sure you are marking out any and all relevant axis intercepts. b. Suppose that the industry is completely unregulated. Calculate the dollar amount of the total damages incurred to society. How did you find your answer. c. Suppose that strong liability laws hold polluters financially accountable for any damages that they cause society. If these laws are sufficiently rigorous and the court system perfectly upholds them, what should be expected to be the level of pollution in the industry? Explain your reasoning. d. If the polluters have to compensate affected parties financially for any damages, what is the dollar amount of these damage payments? How did you find your answer?

Answer 1

-100- MAC, MD MAC MD Curve (64,22.4) 50 emission level, e ou 120

B) unregulated industry

Emission level, till, MAC = 0

So, 48-.4e = 0

e* = 48/.4 = 120

Dollar amount of damage , area under MD curve from 0 to 120

At e = 120, MD = .35*120 = 42

So area = .5*120*42 = $ 2520

-100- MAC, MD MAC MD Curve -50! (64,22.4) 50 emission level, e 100 120

.

c) then at eqm, MAC = MD

48-.4e = .35e

48 = .75e

e" = 64 units

Bcoz then Marginal abatement cost = Marginal damage

.

D) dollar amount of damages, value of MD at efficient level of emissions

= .35*64

= $ 22.4 for per unit of emissions

.

D)