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Micro.Week12.2007

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

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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

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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 =
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

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12/4 Two ways to achieve the efficient result: 1. Emission tax (carbon tax) 2. Tradeable Emissions Permits
12/5 Last topic (hooray!?!?) Trade Key counterintuitive propositions: 1. Trade makes both parties better off 2. Free trade is better than constrained trade.

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

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