Question

Two steel factories are currently emitting 8,000 tons of pollution each (for a total of 16,000 tons). Pollution reduction (abatement) costs for Plant 1 are given by MCR₁= 0.02Q and for Plant 2 by MCR₂ = 0.03Q, where Q represents tons of abatement, and MCR the marginal cost of pollution reduction.

1. Suppose a regulation is implemented that requires each firm to reduce its pollution by 4,000 tons. What will be each firm’s pollution control costs? Draw two graphs on Excel(one for each firm) to support your answer.
   
2. Suppose instead that a pollution tax of $240 per ton of pollution emitted is implemented. How much will each firm now pay in pollution reduction costs (not considering taxes)? How do total pollution reduction costs with the tax compare to the total costs from part (a)? Briefly explain why the costs differ. How much does each firm pay in taxes? Use two graphs on Excel (one for each firm) to support your answer.For Problem 2, please upload your completed MS Excel spreadsheet in HuskyCT to support your answers.

Answer 1

A.

Figure 1

Table 1

Q	MCR1	MCR2
0	0	0
4000	80	120
8000	160	240

The Total abatement cost if the are under marginal abatement cost curve up to Q=4000.

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B)

In case of pollution tax of $240 per ton, each firm will abate that amount for which the marginal abatement cost is $240. In this case for firm 1 and 2 this amount is too high to emit any pollution at all. For firm 1 the highest marginal abatement cost is $160 anf that of firm 2 ia $240. Then both firm instead of paying taxes will abate all the pollution and emit zero pollution. The total abatement cost is the area under the MAC curves with and without taxes.

The Total abatement cost if the are under marginal abatement cost curve up to Q=4000.

The difference in costs is obvious because in the latter case the firms are forced to abate all the pollution while in the former case they abate only half of the total pollution. The firms pay no taxes in each case.