Consider the diagram below, which depicts the external marginal cost of pollution by each ton of sulfur dioxide emitted by power plants, and the marginal abatement cost of eliminating that pollution.
a. Explain why the marginal abatement cost (or marginal benefit of pollution) curve slopes downward.
b. Find the efficient level of pollution and indicate it on your graph.
c. Firms, which care little about the damage imposed on people hundreds or thousands of miles away, have little incentive to produce the optimal amount of pollution on their own. Explain how, if regulators tax the producer $400 for each ton of pollutant emitted, power producers will have an incentive to cut emissions to exactly the socially optimal level.
d. Explain why a tax of $600 for each ton of pollutant emitted is too high a tax, and $200 per ton is too low a tax.