The population in a community with a polluting firm increases significantly from Period 1 to Period...

The population in a community with a polluting firm increases significantly from Period 1 to Period 2. As a result, marginal damage function changes from MD₁ = 3E to MD₂ = 4E. The marginal abatement cost function for the polluting firm, which is in a competitive industry, is MAC = 120 - 2E. The MAC function does not change between the two periods.

(a) How would you adjust an emission standard so that the socially desirable level of emissions exists in each period? Show necessary calculations and write down your suggestion clearly.

(b) If an emission tax policy is used (instead of an emission standard) to reduce emissions to the socially desirable level in each period, what should be the tax rate/s in each period? Show necessary calculations to justify your suggestion.

Expert Solution

Rahul Sunny answered 7 months ago

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