Assume you are an analyst assessing national costs of mercury abatement. Your st

Question

Assume you are an analyst assessing national costs of mercury abatement. Your staff has estimated the marginal social costs to be MSC = 0.8Q and the marginal abatement cost across polluters to be MPC = 0.65Q, where Q is measured in percent abatement and marginal costs are in millions of dollars.

a) Based on these estimates, what must be the equation for MEC?

b) The equation in part (a) tells us that for each additional 1 percent of mercury abatement, the marginal cost (MC) is:

c) Assume government determines that firms need to abate 20%. What would the price of the pigouvian tax need to be to ensure an abatement quantity of 20%? Pigouvian tax = $_____ million

Explanation / Answer

MPC + MEC = MSC

MEC = MSC - MPC

=0.8Q - 0.65Q

= 0.15Q

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