12 May WHAT HAPPENS TO THE TOTAL COSTS FOR THE OTHER FIRM? WHY?
Pennsylvania: Bethlehem: MCB= 1.1AB TCB=0.55(AB)2 National: MCN= 0.4AN TCN= 0.2(AN)2Assume that each plant emits 40 units of PM2.5 for a total of 80 units. In order for the Pittsburgh area to meet the new standard, the EPA determines that thecombinedabatement for both plants must total 30 units.a. Assuming the new abatement standard is implemented uniformly between the two firms, find the total cost of abatement for each firm and the overall total cost of abatement. Show your work.b. Mathematically or graphically demonstrate that your answer to (a) is NOT cost effective.c. Find the cost effective solution for 30 total units of abatement. Show your work and clearly indicate both ABand AN. Note that this is similar to the Puzzle on page 317 but with MC as a function of abatement levels (level of pollution reduced) rather than as a function of pollution. But see the solution to that puzzle if you need help solving this problem.d. Verify that your solution in (c) is cost effective by showing that the marginal cost of abatement is the same for both firms.e. Under the cost effective solution, which firm experiences increased total costs relative to the uniform abatement policy? Why? What happens to the total costs for the other firm? Why?f. Calculate thetotal cost savingsassociated with the cost effective solution relative to the uniform abatement standard. Show your work.3. Assume that pollution reduction has marginal benefits measured in dollars equal to 20-2x, and marginal costs (in $) equal to 5 + (x/2), where x is the tons of pollution reduced per week.a. Graph the MB and MC curves. Show the value for x* (the efficient level of pollution reduction) and for the dollar value of the MC and MB associated with this level of x.b. As a result of imperfect information, regulators are considering two inefficient policies: a tax 10% below the efficient tax level and a marketable permit system with the number of permits to be issued 10% below the efficient reduction level. Which is more efficient (or closest to the efficient outcome)? Explain or show graphically or mathematically.c. Suppose the regulators did not know exactly what the MB was but did know that this pollutant was a threshold pollutant. Should they use a tax or a permit system if they are interested in efficient regulation? Explain why.4. Answer the following questions. a. Under a pollution tax system, do firms have the incentive to overstate or understate their costs of pollution reduction? Explain why. b. Under a pollution permit system, do firms have the incentive to overstate or understate their costs of pollution reduction? Explain why. c. Read Application 15B.0 and answer the question at the end of the second paragraph, Does the same incentive hold for CAC regulation? Explain your answer.
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