In the city of Fort McMurray, Alberta, there is production of oil sands that emits air and water pollution emissions (E) that imposes external damages onto society. The aggregate marginal abatement cost (MAC) and marginal damage (MD) curves have been estimated as follows:
MAC = 1000 - 20 E MD = 20 E
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 damages imposed on others from this level of emissions.
c.) The government is considering an environmental policy that would reduce emissions by 20% of the level produced in the unregulated, competitive economy. Calculate the net benefits of such a policy and show the total costs and total benefits in a new MAC/MD diagram. Can the proposed policy be supported on economic grounds?
d.) Does the environmental policy in part (c) produce a socially efficient level of emissions (E*)? If not, show in a new MAC/MD diagram the socially efficient emissions level, and show and compute the total benefits, total costs, and net benefits from this level of emissions.