E130PS4 - Professor Valerie Ramey Econ 130, Fall 2007...

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P r o f e s s o r V a l e r i e R a m e y Econ 130, Fall 2007 Problem Set #4 1. (Tradeable Permits) Three plastics factories emit noxious fumes. Each factory currently emits 100 tons, so total emissions are 300 tons. Suppose that the marginal costs of reducing emissions for each factory are given by: 11 2 2 3 3 ,, 45 M CZ M C Z M C Z == = where Z 1 is the reduction of emissions from factory 1, etc. The EPA has decided that total emissions must be reduced by 180 tons, so total Z must be 180. A. How should emissions reductions be allocated across plants so as to reduce emissions in the least costly way? What is each factory’s marginal cost at this point? What is each factory’s total cost and the combined total cost under this scheme? (Hint: Total cost is the area under the marginal cost curve.) B. Suppose one of the factory managers demands that the abatement be shared equally by each factory, so Z 1 = Z 2 = Z 3 = 60. What is each factory’s marginal cost and total cost of abatement? What is the social cost (combined total cost for each factory) under this scheme?
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E130PS4 - Professor Valerie Ramey Econ 130, Fall 2007...

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