PART A:
The marginal cost of pollution abatement differs between twp industrial firms. The data for the Acrid Acid Co, and the Smelly Smelter Ltd. Are shown below
|
Acrid Acid
Unit of Abatement
|
MC
|
Smelly Smelter
Unit of Abatement
|
MC
|
|
1
|
$1
|
1
|
1
|
|
2
|
3
|
2
|
2
|
|
3
|
7
|
3
|
3
|
|
4
|
12
|
4
|
4
|
|
5
|
18
|
5
|
5
|
|
6
|
25
|
6
|
6
|
a) The second unit of pollution abatement by Acrid would cost $_______.
b) The third unit of pollution abatement by Smelly would cost $_______.
Suppose the government decides to reduce pollution by 6 units and demands a 3-unit reduction by both firms:
c) The total cost of Acrid will be$______.
d) The total cost of Smelly will be $________.
e) The total cost of the 6-unit reduction will be $________.
f) The total cost of Acrid will be$______.
g) The total cost of Smelly will be $________.
h) The total cost of the 6-unit reduction will be $________.
By requiring equal reductions by both firms, the cost of pollution reduction (will, will not) be minimized. Suppose the government, instead of demanding a 6-unit reduction in pollution, placed tax of $3.50 on each unit of pollution.
i) Acrid would reduce pollution by ______ units.
j) Smelly would reduce pollution by _______ units.
k) With the tax each firms (will, will not) reduce pollution by the same amount. The firm with the highest marginal cost of pollution abatement will reduce the (most, least), and this (is, is not) socially efficient.
In PART A suppose each firm was causing 6-units of pollution and the government wanted to reduce pollution to a total of 6 units by issuing 3 tradeable pollution rights to each firm.
a) Without trading, Acrid must abate pollution by ______ units. If it obtained one more pollution right, it would have to abate pollution by ______ units and save $_____. If Acrid could get a pollution right less than $______, it would (decrease, increase) net income.
b) Without trading, Smelly must abate pollution by ______ units. If it obtained one more pollution right, it would have to abate pollution by ______ units and extra cost of $_____. If Smelly could get a pollution right less than $______, it would (decrease, increase) net income.
c) Both firms would benefit if the pollution unit sold for more than $_______ but less than $______.
d) Explain why only one pollution right would be exchanged between the two profit-maximizing firms.
Part B:
a) There are two firms A and B in an industry in which entry is blocked. The equation for the industry demand curve is P = 30 – 2Q where Q is the sum of the quantities sold by A and B. Neither firm has any costs. Firm A is the industry leader and Firm B always sells one-half of the number of units that Firm A sells, i.e., if A places 10 units on the market then B places 5 units.
|
A's
Output
|
B's
Output
|
Industry
Output
|
Industry
Output
|
A's
Profit
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7
|
|
|
|
|
b) How many units should A place on the market to maximize its profits? _________
What will be the industry price? $_________.