Assume there are two countries in the world, Unicornville and Lepriconia. When generating electricity, the central utility in each country emits pollution into the atmosphere which mixes with the rest of the air creating uniform pollution levels throughout the world (e.g. if 1 ton of pollution is emitted in Unicornville, both Unicornville and Lepriconia face an atmosphere with 1 ton of pollution in it). For polluters in both countries, suppose their current production of pollution is 8 tons each and the marginal cost of abatement is $10 per ton of emis- sions. The marginal benefits of abatement for residents of Unicornville is 13 - A and is 12 - 2A for residents of Lepriconia, where A is one ton of abated emissions. Using this information, answer the following questions.
Part (a) Suppose there are no enforcement costs associated with making sure polluters comply with any abatement regulations. In this case, what is the socially optimal level of global pollu- tion abatement? Show this graphically. Without regulation, is the world producing too much, too little, or just the right amount of pollution from a social standpoint?
Part (b) Suppose Unicornville and Lepriconia decide that it's time to reduce air pollution. At the moment, there is no governing body that will allow one country to enforce policies within the other country so Unicornville and Lepriconia must work independently to reduce air pollution. To this end, each requires the home electricity company to pay their residents for the damages they incur from the pollution they emit. Each country makes no assumption about the behavior of the other country. How much pollution will be abated in Unicornville? How much pollution will be abated in Lepriconia? By how much will global air pollution be reduced?
Part (c) Alternatively, Unicornville and Lepriconia are considering forming an institution that will be able to enforce global policies. With such an institution, polluters will be required to pay for the damages people incur from the pollution they emit, regardless of the country in which they live (i.e. they are not only required to compensate residents of their own country, but also residents of the other country). In this case, how much pollution will be abated by the electricity company in Unicornville? How much pollution will be abated by the electricity company in Lepriconia? By how much will global air pollution be reduced?
Part (d) Did you find a difference between the global abatement levels in Parts (b) and (c)? Explain your findings.