Consider the industry for making plastic cups. The process of producing the cups generates pollution. Assume the marginal damage function of pollution is given by MD = 4E, where damages are measured in dollars and E is the level of emissions. Assume further that the marginal abatement cost function is given by MAC = 100 − E, where costs are measured in dollars and E is the level of emissions.
(a) Propose the efficient emission standard for this industry.
(b) Assume the Environmental Protection Agency has a limited budget (an easy assumption to believe) and can only detect violations of the standard 25 percent of the time. Assume that firms know this, and the industry adjusts accordingly. If the government set a fine of $80 for each unit in excess of the efficient level, what is the expected level of emissions in the industry?
(c) Sketch a graph that depicts the cost to society from undercompliance with the efficient emission standard. (d) Propose a fine for caught violations that would implement the efficient level of emissions. Justify your proposal.