Question

Consider a marginal damage function as following; the MD initially rises with the amount of
pollution (M), however, when some critical level is reached, an individual who can no longer
tolerate leaves such that the damage to them becomes zero. When many individuals are affected
and they have different tolerance levels to the increasing concentrations, the sum of MD begins to
fall as depicted in the diagram below. The MB function is of conventional shape.

АО - MD MB 2M мм, м

Identify the efficient point(s) on the diagram. Explain why you picked the point(s).
b. How do net benefits compare if pollution level is M1 , M2 , M3? Draw a net benefit curve that is
consistent with the diagram above.

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Answer 1

- - Bm D 2MB

Answer a :-

The most efficient points on the above figure are point R and P because the difference between the marginal benefit and the marginal damage is the highest between these points . The difference between marginal benefit and marginal damage represents the net benefit derived from pollution abatement.

Answer b :-

The diagram below the first diagram represents the net benefit curve which is highest at the starting then gradually starts falling up to M1 then the marginal damage becomes more than the marginal benefit there by making the net benefit curve negative up to M2 and again the marginal damage is below the marginal benefit curve ab upto point M3 and after point M3 again the net benefit curve becomes negative.