Assume that there are two firms, each emitting 20 units of pollutants into the environment

Assume that there are two firms, each emitting 20 units of pollutants into the environment, for a total of 40 units in their region. The government sets an aggregate abatement standard (A_ST) of 20 units. The polluters’ cost functions are as follows, where the dollar values are in thousands: (2 x 4 = 8 points)

Polluter 1: TAC₁ = 10 + 0.75(A₁)², Polluter 2: TAC₂ = 5 + 0.5(A₂)², MAC₁ = 1.5A₁, MAC₂ = A_2.

a. What information does the government need to support an assertion that the 20-unit abatement standard is allocatively efficient?

b. Suppose that the government allocates the abatement responsibility uniformly, requiring each polluter to abate 10 units of pollution. Quantitatively assess the cost implications.

c. Now, assume that the government institutes an emission fee of $16 thousand per unit of pollution. How many units of pollution would each polluter abate? Is the $16 thousand fee a cost-effective strategy for meeting the standard? Explain.

d. If instead the government used a pollution permit system, what permit price would achieve a cost-effective allocation of abatement? Compare the costs of this allocation to the costs of using the uniform standard described in part (b).

2. (From chapter 6) Suppose you are part of an economic analysis team charged with recommending a policy response to pesticide risks. Your team decides to use risk-benefit analysis as its risk management strategy.

a. On the risk side of the analysis, your team reviews the following data from the risk assessment process. Interpret each of these quantitative findings about pesticide risk, by stating precisely what the numerical value(s) mean or imply in each case. Be specific. (1.5 x 4 = 6 points)

(i) Pesticide W: Reference Dose (RfD) = 0.005

(ii) Pesticide X: threshold level of 0 for infants and children

(iii) Pesticide Y: carcinogenic risk of 0.0075 percent

(iv) Pesticide Z: a dose (D)-response (R) function modeled as R = 0 for all D < 0.6, R = – 0.3 + 0.5D for all D ³ 0.6.

b. On the benefit side of the analysis, briefly describe two distinct benefits to society that are relevant to a risk-benefit analysis of pesticides. (2 points)

3. (From chapter 7) Suppose that the Marginal Social Benefit associated with drinking water quality is estimated to be MSB = 100 – 0.5A, where A is the percentage of mercury abated from drinking water and MSB is measured in millions of dollars. Find the total social benefit (TSB) associated with a federal policy that increases mercury abatement from 20 percent to 30 percent.

(2 points)