Question

II. Assume we're in a system in which marginal costs and benefits follow the figure below MC(x) Ş/unit MB(x) Abatement

Answer 1

When attempt to answer the first question then we assume a functional form for the marginal cost and marginal benefit curves. We can then integrate that assumed function because total cost and total benefits are the integral functions of marginal cost and marginal benefits. For the sake of ease we can assume MC=x and MB= 1-x. we can then integrate them and plot the required graph

When attempt to answer the first question then we assume a functional form for the marginal cost and marginal benefit curves. We can then integrate that assumed function because total cost and total benefits are the integral functions of marginal cost and marginal benefits. For the sake of ease we can assume MC = x and MB = 1-x. we can then integrate them and plot the required graph This is the total cost 7 total benefit graph for the above case Efficient level of abatement can be obtained as X^* where MC = MB = > 4 - x^* = 3x^* = > x^* = 1 Tax that achieve x^* = 1 can be obtained as condition when 4 - x^* = 4 when x^* = 1 = > t* = 3 Hence emission tax = t^* = 3