Question

Consider a chemical plant that discharges toxic fumes over a nearby community. To reduce the emissions of toxic fumes the firm can install pollution abatement devices. Figure 5-8 shows the marginal benefit and the marginal cost from reducing the toxic fumes emissions.

Refer to Figure 5-8. What is the economically efficient level of pollution reduction?


12.5 million tons

9 million tons

8 million tons

0 tons

Answer 1

The firm will abate the emission of 30 pounds of particulates as the marginal abatement cost is less than the pollution tax for this amount.

Step-by-step explanation:

When a firm faces a pollution tax of $1,000 for every 10 pounds of particulates emitted, it must decide whether to pollute and pay the tax, or reduce emissions and incur abatement costs. The cost of abating the first 10 pounds of particulates is $300, the second 10 pounds is $500, and the third 10 pounds is $900, all of which are below the tax amount. However, reducing the fourth 10 pounds would cost $1,500, exceeding the tax. Thus, the firm will abate 30 pounds of particulates, as the marginal cost of abatement is less than the tax for this amount, and they have no incentive to reduce more than that.