Question

depicted in the below figure 2. Firm 1 has marginal abatement cost "Firm 1 MAC 1" and Firm 2 has marginal abatement cost "Firm 2 MAC 1" depicted in figure 1. The industry aggregate marginal abatement cost curve "Aggregate MAC 1 is given in figure 2. a. What is the optimal emissions tax? 0.5 points b. Given the optimal emissions tax what is the total cost of abatement and the total damages of pollution? 0.5 points] c. Suppose that Firm 1 can invest in R& D that would reduce each firm's marginal abatement costs by 50%. What would Firm 1 be willing to invest (HINT: it would be willing to invest up to the savings in total abatement cost and tax payments)? [0.5 points] d. Suppose that the cost of investing in R& D was S10, would the investment go ahead? 0.5 points e. Assume that the government subsidizes Firm 1 to invest and then lowers the emissions tax to 2.4. What would the total cost of abatement and the total damages of pollution be? 1 point Figure 1: Firm marginal abatement costs -Firm 1 MAC1 -Firm 2 MAC 1 -Firm 1 MAC 2 -Firm 2 MAC 2 8 0.85, 6.3 6 1.55, 4.9 0.9,4.1 1.95, 4.1 4 0.5,3.5 3.5 2.65, 2.7 0.9, 3.1 1.5, 2.5 15, 2.85 3.55, 1.45 0.5, 2.25 1.95, 1.525 0.9, 2.05 2.75, 1.125 4 Emission Figure 2: Industry marginal abatement costs and marginal damages 2.8,4.1 1.6,2.4 41 Emission --MD Aggregate MAC1Aggregate MAC 2

Answer 1

Paga MD ブ2-er(2,8.4.2 2 殷-To rap Abate wuut costs at x) M.2 6.2x3.2. = 13.02 2 (c Bim I illing to Spend 2 T13.02 TAC: 13,0 -16) (24 1 2 3 31 CaNinys= (13,02+11-76)-(342-3 12.46

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