Problem: Assume that two power plants, Firm 1 and Firm 2 release sulfur dioxide (SO2) in a small urban community that exceeds the emissions standard. To meet the standard, 30 units of SO2 must be abated in total. The two firms face the following abatement costs:
MAC1 = 16 + 0.5A1
MAC2 = 10 + 2.5A2 where costs are measured in thousands of dollars.
a. Prove that a uniform standard will not meet the cost effectiveness criterion.
b. Determine how the abatement levels should be reallocated across the two firms to minimize costs.