Consider a pulp mill that emits air and water pollution emissions (E) that impose negative external costs (damages) onto society. The aggregate marginal abatement cost (MAC) and marginal damage (MD) curves have been estimated follows:
MAC = 750 − 25E MD = 25E
(a) Using the MAC/MD diagram, plot the MAC and MD curves. Be sure to label the curves and intercept points, and show any calculations.
(b) Explain and compute the unregulated, competitive economy equilibrium level of emissions (EC). Show this equilibrium on the diagram in part (a). Then, show and compute the total abatement costs (TAC) and total damages (TD) imposed on others from this level of emissions. Calculate the total social cost of EC.
(c) What is the total social cost of E=25? Compute and show your answer on a separate graph.