Multiple Source Pollution Control

Mercury emissions from three sources

A state government is evaluating its options for reducing mercury pollution in a particular region. Mercury is currently uncontrolled and is being emitted by three sources, each of which is producing 100units of mercury a year. Source 1’s marginal abatement cost is given by MC1=10*Q1, where Q1 is the amount of abatement it does. Source 2’s marginal abatement cost is MC2=5*Q2, and source 3’s marginal abatement cost is given by MC3=250. The marginal benefits of abating mercury have been estimated tobe MB = 1000 - 5*Qt, where Qt is the total amount of abatement.

  1. Determine the efficient amount of abatement for each source.
  2. Design an emissions tax policy that would lead to the efficient amount of abatement. Calculate the policy’s total cost to each firm. Why might the firms prefer a less efficient command and control policy instead?
  3. 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