Reference no: EM133950665

There are two firms, A and B. Prior to regulation, firm A creates 160 tons of NOx emissions (NOx is a criteria pollutant) each year, while firm B creates 140 tons each year. Because they use different production processes, their marginal abatement curves are given by MACA = 20 + 2A and MACB = 80, respectively. The regulator would like to reduce the total amount of emissions from both firms by 150 tons in the following year and is considering a variety of prescriptive regulations to do so.

Part A: As a baseline, assume that the regulator knows MACA and MACB and is able to impose individual standards on each firm. Calculate the amount of abatement that the regulator will require of each firm (AA and AB). Also calculate DWL, if there is any.

Part B: For legal reasons, the regulator is only permitted to use a uniform standard that forces each firm to reduce by 75 tons each. What is the DWL from this policy? It may be helpful to draw a picture.

Part C: Suppose the regulator instead chooses to ask each firm to abate 50% of what they produced last year. Since the firms originally created 300 tons of emissions, this will still result in a 150 ton reduction in emissions. What is the DWL from this policy? Again, it may be helpful to draw a picture.

Part D: Using concepts we learned in class describe (in 1-3 sentences) why the DWL in Part C is larger than the DWL in Part B, even though it seems to be more fair to ask firm 1, the larger polluter, to reduce more.