Multiple Source Pollution Control

Ozone emissions from two sources

Consider a city dealing with a severe ozone problem. Ozone levels are initially uncontrolled and there are 100 units of it in the atmosphere. The ozone results from emissions at two sources, each of which is responsible for 50 units. Source 1 can abate its emissions at a marginal cost given by MC1=2*Q1, where Q1 is the amount of abatement it does. Source 2’s marginal abatement cost is MC2=4*Q2. The marginal benefits of abating the ozone are believed to be given by a function of the form: MB=A-B*Q, where A and B are parameters and Q is the total amount of abatement.

  1. A hedonic pricing study has been done on the value of improving air quality. The study reports that the marginal benefit for an improvement in air quality from the uncontrolled level would be $200. The authors also calculate that if the ozone level were reduced to 75 units, the marginal benefit of abatement would fall to $150. Determine the efficient level of abatement. How much should source 1 clean up? Source 2?

  2. Design a tradable permit policy that would achieve the efficient amount of abatement while spreading the overall cost equally between the two firms. How many permits would you distribute to each firm? What would the price of a permit be in equilibrium?
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 04/07/2006