Acid rain pollution is produced from two sources, a power plant and a smelter. Studies show that the marginal cost of reducing acid pollution at the power plant is given by the function MC₁ (A1) = 10+ A1 where A₁ is the units of acid rain reduction (or “abatement") at the power plant; and the marginal cost at the smelter is MC2 (A2)=20+ A2. Suppose that the initial level of pollution was 120 units, but the government has limited pollution to 70 units by selling pollution permits to the two polluters - so that the total amount of abatement is 50 units. Calculate the total demand for permits to pollute at any permit price p per unit of acid rain. If the permit market is competitive, what is the equilibrium price of a permit? How many permits are bought by the power plant, and how many by the smelter? Draw a graph illustrating your answer.

Acid rain pollution is produced from two sources, a power plant and a smelter. Studies show that the marginal cost of reducing acid pollution at the power plant is given by the function MC₁ (A1) = 10+ A1 where A₁ is the units of acid rain reduction (or “abatement") at the power plant; and the marginal cost at the smelter is MC2 (A2)=20+ A2. Suppose that the initial level of pollution was 120 units, but the government has limited pollution to 70 units by selling pollution permits to the two polluters - so that the total amount of abatement is 50 units. Calculate the total demand for permits to pollute at any permit price p per unit of acid rain. If the permit market is competitive, what is the equilibrium price of a permit? How many permits are bought by the power plant, and how many by the smelter? Draw a graph illustrating your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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