Micro.Week12.2007 - 12/1 Go back to problem TWO firms: EACH...

Info iconThis preview shows pages 1–6. Sign up to view the full content.

View Full Document Right Arrow Icon
12/1 Go back to problem TWO firms: EACH generates 100 units of pollution FIRM #1 has TC of cleaning up (of abatement) of TC 1 = A 1 2 FIRM #2 has TC of cleaning up (of abatement) of TC 2 = 4A 2 2 Now suppose that society benefits by $80 for each unit of pollution that is cleaned up. How much should we clean up, and which firm should do it? Want to clean up only if the cost of cleaning up is less than the benefit On a marginal basis, want to clean up one extra unit of pollution only if the marginal cost of cleaning up is less than the marginal benefit of cleaning up That is clean up to the point where MB = MC
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12/2 There are two ways to do this problem. Method 1: Set MB = MC 1 = MC 2 So 80 = MC 1 = MC 2 80 = 2A 1 = 8A 2 Method 2: Derive MC T of abatement for society MC T = MC 1 = MC T MC T = 2A 1 = 8A 2 This tells us that A 1 = 4A 2 Since we know that A T = A 1 + A 2 = 5A 2 or A 2 = (1/5)A T Thus MC T = 8A 2 = (8/5)A T Now set MC = MB 80 = (8/5)A T A T = A 1 = A 2 =
Background image of page 2
12/3 Notice, that if you wanted to reduce pollution by 50, We should not reduce each firm’s pollution by 25 (that is, equal reduction by everyone is usually not efficient) Compare TC 1 + TC 2 both ways
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
12/4 Two ways to achieve the efficient result: 1. Emission tax (carbon tax) 2. Tradeable Emissions Permits
Background image of page 4
12/5 Last topic (hooray!?!?) Trade Key counterintuitive propositions: 1. Trade makes both parties better off
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/13/2011 for the course ECON A04 taught by Professor Mk during the Spring '07 term at University of Toronto- Toronto.

Page1 / 18

Micro.Week12.2007 - 12/1 Go back to problem TWO firms: EACH...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online