Question

1. Suppose a local policy group is trying to decide how much abatement to pursue. The estimated market marginal social benefits (MSB) and market marginal abatement costs (MAC) in dollars are expressed as follows, where A equals units of pollution abated: MSB= 200 - 4A MACMKT= A a. Assuming zero enforcement costs (MCE = 0), what is the efficient level of pollution abatement? b. What is the welfare cost of ignoring pollution (meaning that the policy group does not pursue any abatement)? c. What is the efficient level of abatement if the marginal cost of enforcement (MCE) is 3A? d. What is the welfare cost of ignoring pollution with the revised MCE (3A)?

Answer 1

Answer :-

(a) :- For efficient level of pollution abatement.

MSB=MAC_{​​​​MKT}

200-4A = A

5A = 200

A = 200/5 = 40

(Socially optimal lavel of abatement)

(b) :-  

Social welfare cost of ignoring pollution = Gain in social benefit due to abatement.

Social welfare cost of ignoring pollution (SWC) is given by

SWC = ∫₀⁴⁰ (200 - 4A) dA

= 200A - 2A² l_{​​​​​​0}^{​​​​​40}

= (200 * 40) - (2 * 40²)

= 8000 - 2 * 1600

= 8000 - 3200

SWC = 4800

SWB = $4800

(C) :- The efficient level of abatement if the marginal cost of enforcement is 3A.

Set MSB = MAC_{​​​​MKT} + MCE

200 - 4A= A+ 3A

200 -4A= 4A

200 =8A

A = 200/8

A= 25 ( socially optimal level of abatement)

(d) :- The walfare cost of ignoring pollution (SWC) is given by

SWC = ∫₀²⁵ ( 200 - 4A)dA

= 200A - 2A² l_{​​​​​​0}^{​​​​​25}

  ​​​​​​= 200 * 25 - 2 * 25²

= 5000 - 2 * 625

= 5000 - 1250

SWC = 3750

SWB = $ 3750.