Question

The marginal damage function for carbon monoxide pollution in two regions is given by MDR = 5ER and MDU = 10EU MDR = marginal damage in rural region, ER is the emission in the rural region MDU = marginal damage in urban region, EU is the emission in the urban region The marginal abatement cost in rural region is MACR = 600 – 5ER The marginal abatement cost n urban region is MACU = 600 – 5EU

(i) Calculate the socially efficient level of emission and the MAC at the socially efficient in each region.

(ii) Suppose the regulatory authority imposes a uniform standard at the emission level mid-way between the two socially efficient emission levels (i.e. ½(ER+EU) you calculated in (i) above. Calculate the excess damages from under-control of damages in the urban region and over-control of damages in the rural region. (Hint: first calculate the MAC and MDR and MDU at the mid-way level and then compute the change in total damages in each region relative to the socially efficient levels obtained in (i) above).

Answer 1

Part (i) socially efficient level of emission in each region is determined at the point where marginal abatement costs equals marginal damage for each region

Part (ii)

the regulatory authority imposes a uniform standard at the emission level mid-way between the two socially efficient emission levels

Total dmages fall from 9000 under socially efficient emission to 6250 under unifrom standard

Total damages increase from 8000 under socially efficient emission to 12500 under unifrom standard