Question

Company A, the polluter, is located upstream of Company B, the victim, on a certain river. A productive activity pollutes the water, thereby negatively affecting the value of water to B. In the beginning, before regulation, emissions are E = 96. A’s marginal abatement cost is MAC = 50−A/2, where A is the amount of emissions abatement. B’s marginal abatement damages are MPD = A/3.
a. If polluter A has the right to the river, what is the total damage to B in the absence of bargaining?

b. Draw a graph of firm A’s MAC curve and firm B’s MPD curve, with A’s abatement on the horizontal axis and dollars ($) on the vertical axis. Use shading on your graph to indicate the damages to B.

c. Now suppose victim B has the right to the river. What will be the observed level of emissions from polluter A, in the absence of bargaining? If the transactions costs of bargaining are zero, how much pollution will A emit after bargaining? What will be the net social benefit from bargaining? Indicate this SNB in a new graph.

d. Finally, if the government decides to get involved and limit emissions, what is the level of emissions tax that would achieve the optimal level? How much tax revenue would be collected?

Answer 1

MPD dA 2 At A= 96, Total damage toAs (16)2-3072 be t0 B

pallatin = [4]60 (96)2--(622 = ご q 36 6o a