Question

Consider a pulp mill that emits air and water pollution emissions (E) that impose negative external costs (damages) onto society. The aggregate marginal abatement cost (MAC) and marginal damage (MD) curves have been estimated follows:
MAC = 800 − 20E
MD = 20E

a. On a diagram, plot the MAC and MD curves. Be sure to label the curves, calculate the vertical intercept and horizontal intercepts of the MAC line, and the intersection point of the two lines. Show all calculations. (4 Marks)

b. What would be the unregulated level of emissions (EC )? Calculate the total damages associated with this level. Calculate the total abatement costs associated with this level emissions. (3 Marks)

c. Suppose the government is considering an environmental policy that would result in a target level of emissions (ET ) to be 30% below the unregulated level. Calculate the total damages from this level of emissions. How much are total damages reduced compared to the unregulated situation? Calculate total abatement costs of reducing emissions to ET . By subtracting the abatement costs from the reduction in total damages, calculate the net gain from reducing the emissions by 30%. (Draw a diagram to help you to answer this question, and refer to areas on the diagram to explain your calculations.) (4 Marks)

d. What is the socially efficient level of emissions (E* )? We need to determine whether a policy that produced E* emissions be supported on economic grounds over a policy that produced ET emissions. So, first, compute the total damages (TD) imposed on others from this level of emissions. How much have damages fallen as a result of reducing emissions from ET to E*? Next calculate the increase in total abatement costs as a result of reducing emissions from ET to E*. Subtract the increase in abatement costs from the reduction in total damages to get the total net gain from moving from ET to E*. (Draw a diagram to help you to answer this question, and refer to areas on the diagram to explain your calculations.) (4 Marks)

Answer 1