Question

Carbon monoxide (CO) emissions from internal combustion engines increase in colder climates. Thus, the environmental damage from CO emissions is worse in the winter months than in the summer months. Nonetheless, air quality control authorities use a standard for CO that is uniform throughout the year with no allowance for seasonal effects. The cost and benefit information are as follows:

MSB of CO abatement in winter = 350 - 0.5A

MSB of CO abatement in summer = 140 - 0.2A

MSC of CO abatement = 0.2A

a. If you were in charge of setting a policy for CO emissions, what action would you recommend to ensure an allocatively efficient outcome across the two seasons?

b. Suppose that the government sets a uniform standard for winter and summer at A = 500. Determine the welfare loss associated with this policy.

Answer 1

Answer:-

Given that,

Marginal social benfit of abatement in winter

Marginal Social benfit of abatement in summer

MSC of CO abatement

a)

So

Now,

Then,

b)

Under A Uniform abatement standard of 500.

Therefore, to standard doesn't correspond to abatement level where MSB=MSC for both seasons.

It is not efficient.

Welfare Loss=Area(ABC)

Therefore,Welfare Loss=7875.