In: Economics
For the following questions assume: Marginal Abatement Cost is MAC= 12 – E, and Marginal Damages is MD = E/2
Suppose the same polluter is operating under a regulatory environment such that
the polluter always choses ESE (so the regulation updates as polluters innovate). The
firm has the option of undertaking a technological innovation in abatement such
that it would face
MAC = 6 – E/2 after implementation.
9) What is the incentive to innovate (the net private benefit to the polluter of
implementing the innovation: Total Private Cost TPCO(ESEOLD) – TPCN(ESENEW)?
a) -1
b) 0
c) 2
d) 6
e) None of the above
So, here under the old technology the “MAC” is given by, “MAC = 12 – E”. So, without any regulation the firm will emit such that “MAC = 0”. So, “12 – E = 0”, => “E = 12”. Now, the marginal damage is given by, “MD = E/2”, => the socially optimum level of emission is given by the condition, “MAC = MD”.
=> 12 – E = E/2, => 3*E/2 = 12, => E = 8 < 12. So, here the total cost is given below.
=> (12 – 8)*4*0.5, where MAC = MD = 4, at E = 8, => total cost is “8”, here the cost is the total abatement cost the area under the “MAC” form “E=8” to “E=12”.
Now, under the new technology the “MAC” is given by, “MAC = 6 – E/2” and “MD = E/2”, => the optimum emission without any restriction is “MAC = 6 – E/2 = 0, => E = 12”.
Now, the socially optimum level of emission is given by, “MAC = MD, => 6 – E/2 = E/2”.
=> E = 6, => the total cost is “0.5*(12 – 6)*3 = 9”.
=> the incentive to innovate is “8 – 9 = (-1)”, => “a” be the correct answer.