There are three industrial firms in a quaint town of South Orange where the municipal government wants to reduce pollution to 120 units from uncontrolled level of 210 units. Three firms have constant marginal abatement costs as shown in the table below.
|
firm
|
initial pollution level
|
marginal abatement cost
(cost of reducing pollution by one unit)
|
|
A
|
70 units
|
20 dollar
|
|
B
|
90 units
|
25 dollar
|
|
C
|
50 units
|
10 dollar
|
Suppose that the municipal government is to pass an environmental standards law that limits each firm to 40 units of pollution.
(a) What will be the abatement costs for firm A, B, and C? What will be the total abatement costs of the three firms?
(b) Firm C has an opportunity to make R&D investment to lower marginal abatement cost by $2 (so marginal abatement cost will be $8). How much does it pay for this R&D investment at most?
Suppose instead that the municipal government issues 40 pollution permits to each firm, each entitling firms to one unit of pollution, and that these permits can be traded.
(c) Who will sell and buy permits? How many permits will be traded? What will be the unit price of the permit?
(d) What will be the abatement costs for firm A, B, and C (do not include payments for permits)? What will be the total abatement cost of three firms?
(e) Firm C has an opportunity to make R&D investment to lower marginal abatement cost by $2 (so marginal abatement cost will be $8). How much does it pay for this R&D investment at most?