Question

Suppose the marginal cost of abatement for an airborne pollutant (like Sulfur Dioxide) is MC = 4X, where X is

measured in tons, and the marginal benefit of abatement is MB = 500 - X. The maximum abatement (reducing pollution to zero) is X MAX = 500 (there are only 500 tons of pollution to abate).
If there is no abatement at all, show the deadweight loss graphically (use letters for all relevant areas) and calculate the DWL as well.

Answer 1

A firm will opt to abate emissions as long as the marginal cost of abatement is less than the pollution tax. In this scenario, the firm will abate the first 30 pounds of emissions because it is cheaper than paying the tax. Beyond that, the firm will pay the tax instead of incurring higher abatement costs.

Step-by-step explanation:

The subject question deals with the economic analysis of pollution tax and abatement costs to determine how a firm will behave.

A firm faced with a pollution tax of $1,000 for every 10 pounds of particulates emitted must decide whether to pollute and pay the tax or reduce emissions and incur abatement costs. As the costs for abatement increase with each additional unit abated, the firm will choose to abate as long as the cost of abatement remains lower than the tax.

Given the marginal costs of abatement outlined, the firm will abate the first 30 pounds of emissions since the associated costs of $300, $500, and $900 are all lower than the $1,000 tax for each threshold.

However, the firm will choose to pay the tax instead of abating once the cost exceeds the tax, which occurs after the third 10-pound increment. Therefore, the firm will abate 30 pounds and will pollute by the remaining amount as that is more cost-effective than further abatement.