Question

Suppose the marginal damages function for a bakery (the pollutee) is: MD = 6E and the marginal abatement cost function for a nearby shoe factory (the polluter) is: MAC = 400 – 4E where E is emissions in tonnes, and costs and damages are measured in thousands of dollars per tonne. Suppose also that the shoe factory is now liable for any damages it causes the bakery.

Using above information, complete the below statements, filling in your final, complete answer in the space/box provided to the right of the statement.

a.) EMAX is equal to

b.) At E = EMAX, TD is equal to

c.) At E = EMAX, TAC is equal to

d.) At E = EMAX, costs to the pollutee are equal to

e.) At E = EMAX costs to the polluter are equal to

f.) At the socially-efficient level of emissions, TD is equal to

g.) At the socially-efficient level of emissions, TAC is equal to

h.) At the socially-efficient level of emissions, costs to the pollutee are equal to

i.) At the socially-efficient level of emissions, costs to the polluter are equal to

j.) If emissions are decreased from EMAX to the socially-efficient level of emissions, cost-savings for the polluter are equal to

Answer 1

See the graph to solve questions -

a) EMAX means emission maximum which can be calculated when we put MAC = 0

So, EMAX is 100

b) Total damage (TD) at E = EMAX = 100

From the graph area of triangle a + b + c or area of triangle OAB shows the total damage(TD) at E = EMAX= 100

Area of traingle =

( MD = 6E, so 600)

Therefore TD, at EMAX = 100 is $30000

c) At E = EMAX = 100,   TAC is zero

d) AT E = EMAX = 100, costs to the pollutee is equal to the marginal demage at 100

Substitute E as 100

Therefore, Cost to the pollutee at EMAX = E is $600

Similarly

Similary

(MD = 6E , so 6*100)

Therefore total damage is a + b + c