Question 1. Suppose that you want to reduce the emissions from two firms. Their marginal abatement cost schedules are in the following table. An entry in the table indicates the cost of reducing emissions by one unit from the previous level. For example, $60 is the additional abatement cost for Firm 1 to reduce its emissions from 3 tons to 2 tons.
(a) Complete the total abatement cost information for both plants
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Marginal Abatement Costs
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Total Abatement Costs
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Firm Emissions (tons)
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Firm 1
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Firm 2
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Firm 1
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Firm 2
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8
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$ 0
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$ 0
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7
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10
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5
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6
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20
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10
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5
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30
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15
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4
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40
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20
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3
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50
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25
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2
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60
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30
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1
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70
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35
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0
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80
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40
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(b) What would total emissions be in the absence of any sort of pollution control?
(c) How much would you allow each firm to emit if you wanted to limit total emissions to 10 tons in the cheapest way possible?
(d) Confirm your answer to (c) by calculating the aggregate abatement costs for each possible way to limit total emissions to 10 tons in the table on the top of the next page.
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Firm 1
Emissions
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Firm 2
Emissions
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TAC for
Firm 1
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TAC for
Firm 2
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Aggregate
Abatement Costs
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2
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3
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4
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5
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6
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7
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8
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(e) How much would you allow each firm to emit if you wanted to limit total emissions to 7 tons in the cheapest way possible?
(f) Confirm your answer in the table below.
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Firm 1
Emissions
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Firm 2
Emissions
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TAC for
Firm 1
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TAC for
Firm 2
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Aggregate
Abatement Costs
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Question 2. Using the MD (Marginal Damage) function and the MAC (Marginal Abatement Cost) function, graphically show a situation there the efficient level of emissions will be zero in space below. Offer a brief example for a situation like this.