Suppose the marginal cost of abating X units of pollution is given by MC(X) = 2X and marginal benefits are MB(X) = 10-2X. Suppose Current pollution = 4 = Xmax
a) What is optimal level of pollution abatement, X*?
b) What are total costs, marginal costs and total net benefits at X=X*?
c) What is the total net benefit of making and enforcing a rules that bans pollution completely? What is the marginal benefit from removing the last little bit of polution (i.e. the marginal benefit around point X=Xmax)?
d) If a ban is placed on new wood burning fire places. Argue why marginal net benefit is likley to get smaller and become negative as policies eliminate more and more fireplaces.