2 Assume that a government decides to reduce emissions from

2. Assume that a government decides to reduce emissions from 30 tonnes per year to 15 tonnes per year. The table demonstrates the marginal abatement costs of three firms, related to the quantity of emissions. Each firm is now emitting 10 tonnes/year, so total emissions are 30 tonnes year Two different ways to reduce emissions are under discussion a. to reduce emissions equally (i.e. with an equiproportionate decrease in emissions) b. to reduce emissions in cost-efficient way (i.e. with a decrease that meets the equimarginal principle) 4 Emissions, tonnes/year Source1, S/tonne Source 2, S/tonne Source 3, S/tonne 10 12 16 20 24 283646 58 12 20 24 28 36 10 0 6 Calculate the total costs of decreasing emissions equiproportionally (each source reduces by 50 percent). (7 points) a. b. Calculate the total costs with a decrease in emissions that meets the equimarginal principle points) Which way to reduce emissions would you advice the govemment to choose? Explain how did you arrive to this recommendation, you may refer to your calculation (6 points) c.

Solution

a.

Economic activity causes pollution. Pollution is a spillover cost of production that causes inequality and distorts the allocation of resources. Government therefore regulates private business by the standard approach and incentive based environmental policies. With the standard approach, a maximum acceptable level of pollutant is established and firms that exceed this level are punished by the means of fine. On the other hand, the incentive-based regulation schemes are pollution fees and pollution permits that utilize efficiencies of the marketplace.

If each firm abats same level of pollution, they should abate 5 tonne per year. Becasue the cirrent emission in 30 ton. The government want the emission to be reduced to 15 ton, the abatement amount should be (30-15)=15 ton. Then each firm ahouls abate 5 ton/year. The marginal cost of abating this level of pollution for source 1 , 2 and 3 is given in the table below

Emission

MAC1

MAC2

MAC3

TC1

TC2

TC3

10

0

0

0

0

0

0

9

4

1

1

4

1

1

8

8

2

2

12

3

3

7

12

4

3

24

7

6

6

16

6

4

40

13

10

5

20

8

5

60

21

15

Then total abatement cost for firm 1 is 60, for firm 2 is 21 and for 3 it is 15. Then total cost of abatement is 96.

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b.

For equimarginal cost. we circle the same marginal cost for all the three firms. In this process all the firm has two common MAC level. $4 and $8. This is summarize in the table below

MAC

firm 1

2

3

4

9

7

6

22

8

8

5

2

15

For total emission to reach 15 tonnes with equal marginal cost is $4. Thus in this case firm 1 abates 8 ton, firm 2 5 and firm 3, 2 tons. Then total abatement cost is for 1, 12. for firm 2 is 21 and for 3 is 28. Then the total cost is 61.

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c)

Two classification of standard approach is: (a) Performance standard, (b) Design standard.

In this case the most cost effective way is to eradicate pollution with equimarginal cost approache. In this case total cost is minimized as compared to equiproportional standard.

Emission	MAC1	MAC2	MAC3	TC1	TC2	TC3
10	0	0	0	0	0	0
9	4	1	1	4	1	1
8	8	2	2	12	3	3
7	12	4	3	24	7	6
6	16	6	4	40	13	10
5	20	8	5	60	21	15