Environmental Economics
You work for the state environmental office and have been told that you are now in charge of determining the optimal amount of pollution allowed from powerplants in the area. You recognize that emissions from this powerplant causes damage to the environment, but that it is also costly to reduce the number of emissions due to reduced production of the plant. You work for the state environmental office, and you’ve been told that it’s now your job to figure out how much pollution power plants in the area can put out. You know that this power plant’s emissions hurt the environment, but you also know that reducing emissions costs money because it means less power from the plant.
After doing some research you find that the Marginal Damage Cost (MDC) and Marginal Abatement Cost (MAC) can be represented by the following equations:
MDC = 4e and MAC = 120 – 2e
A. (1.5 points) Graph the MAC and MDC curves on a single graph. What is the maximum level of unregulated or uncontrolled pollution for the firm? What is the total cost of pollution when the market is unregulated?
B. (1.5 points) What is the optimal amount of pollution emitted by this firm? What are the total abatement costs, total damage costs, and total pollution costs associated with the optimal level of pollution?
C. (1.5 points) A local environmental group is currently holding a protest where they are declaring any level of emissions as inherently wrong and that any form of pollution is an evil afront to the environment. According to them, the only right thing to do is reduce emissions down to zero. It is part of your job to reason with the protesters as to why the optimal level of emissions you calculated in part A should be followed. For your argument, calculate the Total Pollution Cost when emissions are zero and compare that to the Total Pollution Costs at the optimal level of emissions for part B. What would you tell the protesters?
D. (1.5 points) It has been discovered that you will need to hire regulators to enforce whatever pollution controls you impose on the company, and that the powerplant will have to hire a secretary to keep track of these pollution records. The sum of these enforcement costs will increase marginal abatement costs by $60. Either draw a new graph or draw a new MAC
curve on your graph for part A to demonstrate this change. What is the new optimal level of pollution given these enforcement costs? Find the total cost of pollution at this new optimal level and explain why it has changed
