INTRODUCTION TO ENVIRONMENTAL ECONOMICS
ECP 3302 MAHADEV BHAT
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The marginal damage and the aggregate marginal abatement cost functions of SO2 emission are given below.
Marginal Damage: MD = – 600 + 600E
Marginal Abatement Cost: MAC = 5400 – 400E
where E is the level of SO2 emitted.
(a) Does the above damage function have a threshold level of emission? (hint: set MD equal to zero and solve for E). Compute the emission level at which MAC will be zero (uncontrolled level of emission).
(b) Compute the “efficient” units of emission controlled (hint: first compute the efficient level of emission by solving the above two equations simultaneously and then find the efficient units of emission controlled).
(c) Suppose that the regulatory agency incurs certain cost of enforcing the emission control program: the enforcement cost function is given by:
Marginal Enforcement Cost: MEC = 1350 – 100E
What would be the change in the “efficient level of emission and number of emission units controlled? [hint: add the MAC and MEC functions together and follow the procedure for question (b)].
(d) Compute the total damage costs, total abatement costs and total enforcement costs for the efficient levels of problem (b) and problem (c) above?
Below are the marginal costs of pollution cleanup for firms A and B each of which, if unregulated, will emit 10 units of sulfur dioxide per year.
0 2 3 4 5 6 7 8 9 10
of Firm A ($)
180 160 140 120 100 80 60 40 20 0
of Firm B ($)
270 240 210 180 150 120 90 60 30 0
The regulatory agency decides to cut down the number units of sulfur dioxide emitted to 10 from the current level of 20 units.
(a) Find the least-cost allocation of cleanup responsibility of the two firms. Compute the total costs of cleanup to both the firms.
(b) What would be the emission levels of the two firms if the agency asks both firms to reduce emission by the same amount (equiproportionate allocation) to meet the above cleanup standard? Compute the total costs of cleanup for the two firms and compare the same with values computed in (a) above.
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