Question

2. A community suffers from a pollution problem created by a polluter with MAC=60-2E. The damage to community from the pollution is captured by MD= 3E.

(a) If an emission the tax rate of $16/unit is applied, what will be the polluter's compliance costs in equilibrium? Show work.

(b) If emission standard is set at E= 20, what is the amount of compliance costs faced by the polluter? Show work.

(c) What is the best way to choose standard from the society's point of view in this situation? Show work.

Answer 1

Equilibrium emission (E) is as below:

MAC = MD

60 – 2E = 3E

60 = 3E + 2E

60 = 5E

60/5 = E

E = 12

a.

Since the tax rate is $16 per E, the polluter’s cost is as below:

Polluter’s cost = E × Tax rate

                        = 12 × $16

                        = $192 (Answer)

b.

If the standard is set as (E = 20),

Polluter’s cost = MAC

                        = 60 – 2E

                        = 60 – 2 × 20

                        = 60 – 40

                        = $20 (Answer)

c.

The standard should be set at on the equilibrium level, since anything above which would be a difference between MAC and MD – MAC increases and MD decreases, which doesn’t favour society. Therefore, equilibrium level is the best standard – making no difference.

MAC = MD

60 – 2E = 3E

60 = 3E + 2E

60 = 5E

60/5 = E

E = 12