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Unformatted text preview: costs to emissions.
(c) A market equilibrium can never be a social optimum because MSC =
False: If there are no externalities of any kind, then a market equilibrium is
a social optimum because MSC corresponds to the supply curve, and MSB
corresponds to the demand curve, so the market equilibrium is a social
2. Suppose that there are two ﬁrms (1 and 2) in an industry with marginal
abatement cost curves as follows:
MAC1 = 100 − 0.1E1
MAC2 = 25 − E2 (1)
(2) E1 and E2 represent the respective amounts of emissions of each ﬁrm in litres.
Note that the constant marginal damages from each unit of output of this
industry is $50.
 (a) Derive the industry MAC curve for this industry. Very brieﬂy explain.
First rewrite the MAC curves as a function of abatement:
MAC1 = 0.1A1
MAC2 = A2 1 (3)
(4) Next use the cost minimizing condition plus the adding up condition to
determine the cost-minimizing allocation of abatement between the two
sources and then use this to solve fo...
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- Fall '12