C a market equilibrium can never be a social optimum

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Unformatted text preview: costs to emissions. (c) A market equilibrium can never be a social optimum because MSC ￿= MSB. 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 optimum. 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. [8] (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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