Environmental Econ Question?

Question

Not sure if I've posted under the correct category, but here I go.

1. Suppose we have two firms with marginal abatement cost curves as follows:

MAC1 = 300 – 4E1

MAC2 = 100 – E2

E is a measure of emissions in litres

MAC is Marginal abatement cost

Question: What is the lowest cost way of achieving 80 litres of abatement? (looking for a $ value here)

Answer 1

E=80

MAC1 = 300 – 4*80=300-320= -20

MAC2 = 100 – 80= 20

MAC=(TAC)'

TAC1 = 300E1 – 2E1^2

TAC2 = 100E2 - (E2^2)/2

E1+E2=80

E1=80-E2

TAC1+TAC2 ->> minimization ->> (TAC1+TAC2)'=0

TAC1+TAC2 = 300E1 – 2E1^2 + 100E2 - (E2^2)/2 =

=300(80-E2) - 2(80-E2)^2 + 100E2 - (E2^2)/2 =

=11200+120E2-2.5(E2^2)

(11200+120E2-2.5(E2^2))'=120-5E2

120-5E2=0

120=5E2

E2=120/5

E2=24

E1=80-24=56

TAC=11200+120E2-2.5(E2^2)

E2=24

TAC=$12'640

Answer 2

Environmental regulations. Under this plan the economic impact has to be estimated by the regulator. Usually this is done using cost-benefit analysis. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions. Some firms, in this system, can abate inexpensively, while others can only abate at high cost. Because of this, the total abatement has some expensive and some inexpensive efforts to abate. Environmental economic regulations find the cheapest emission abatement efforts first, then the more expensive methods second. E.g. as said earlier, trading, in the quota system, means a firm only abates if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.