Suppose a Polluting Firm Has MAC = 400 - ½

question 1

Essay

Suppose a polluting firm has MAC = 400 - ½ E.Calculate the firm's level of emissions,abatement and total compliance cost if it faced an effluent fee of $120 per unit of emissions.
The firm will emit where MAC = tax:
400 - ½ E = 120
E = 2 * (400 - 120)= 560
Abatement will equal the unregulated level of emissions minus emissions of 560.Unregulated emissions are found where MAC = 0:
400 - ½ E₀ = 0
E₀ = 800
So abatement equals 240 units.The total compliance cost of the firm will equal the sum of its total abatement cost and the emission taxes it pays.Total abatement cost is the area under the MAC curve from emissions of 560 to emissions of 800:
TAC = ½(240 * 120)= $14,400
Total taxes paid will equal the level of emissions times the tax of $120 per unit of emissions:
Taxes paid = 120 * 560 = $67,200
Total compliance cost of the firm is therefore $81,600.

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