Question

Question 3 (11 points) liability Q Consider a firm, which is polluting the water near Good Grief, Idaho. The marginal damage cost of this pollution is given by; MDC - - 6 + 0.75 e where e is the level of emissions. The marginal abatement costs are; MAC - 200 - 2 e. (a) Determine the optimal level of emissions. (b) Draw a diagram showing the MAC, MDC and the optimal level of emissions. On this diagram show the total damage cost and the total abatement costs associated with the optimal level of emissions. (c) Suppose that the firm is liable for the damages caused by its emissions. Explain verbally and with the use of your diagram from part (b), how this liability policy will yield the optimal level of emissions. (d) Calculate the value of the liability payment the firm will ultimately make.

Answer 1

Solution : Question 3; Given MPC=-6 +0.75e MAC = 200-24 @ optimum level of emissions : Mpe = MAC 6+0.750 = 200-2e geto.75€ = 20076 2.75€ = 206 (e-74.9090] MPC = -6 +0.76 (74.9090) --6+ 56.175 (Mpe = 50.175 MAC = 900–2(74.9090) I 200 - 149.818 = (50.182

(6 Graph showing mac and moe and e; 2007 MAC 150 + (74.9090,50.175) hoo 50+ Total Total abatement Cost time to iso doo Ze © If fom is liable for damage caused by its emission: - Here pollution Sim will be willing to pay for the damage if its lower than abatement cost. This is the till 74.90 units of emissions , cheapest to abate than • Now, Beyond that it clear that to pay for damage. I value of liability payment the firm will ultimately make i

vake of liability payment, = 0.5) (94:90) (50.175) = (1879.053] - oor