12.4 The Fireyear and Goodstone Rubber Companies are two firms located in the rubber capital of the world. These factories produce finished rubber and sell that rubber into a highly competitive world market at the fixed price of $60 per ton. The process of producing a ton of rubber also results in a ton of air pollution that affects the rubber capital of the world. This 1:1 relationship between rubber output and pollution is fixed and immutable at both factories. Consider the following information regarding the costs (in $) of producing rubber at the two factories (QF and QG): Fireyear Costs 300+2Q Marginal costs 4QF Goodstone 500+ Q 2QG Total pollution emissions generated are EF + EG = QF +QG. Marginal damage from pol- lution is equal to $12 per ton of pollution. a. In the absence of regulation, how much rubber would be produced by each firm? What is the profit for each firm? b. The local government decides to impose a Pigovian tax on pollution in the community. What is the proper amount of such a tax per unit of emissions? What are the post-regulation levels of rubber output and profits for each firm? c. Suppose instead of the emission tax, the government observes the outcome in part (a) and decides to offer a subsidy to each firm for each unit of pollution abated. What is the efficient per amount unit of such a subsidy? Again calculate the levels of output and profit for each firm. d. Compare the output and profits for the two firms in parts (a) through (c). Comment on the differences, if any, and the possibility of one or both of the firms dropping out of the market.

1. A firm's marginal abatement cost function is given by MAC = 200-5E. Suppose that, after adopting new abatement technology, the firms marginal abatement function becomes MAC = 160-4E. Costs are in dollars per tonne and emissions are in tonnes per year. The firm is given 20 tradeable pollution permits (each permit allows it to emit one tonne of pollution) and the current market price per permit is $100. a)Given no change in the permit price how many tonnes of pollution will the firm emit? b)What will be the firms total abatement cost? Will it buy or sell permits and how many? c) What will be the net cost to the firm after trading? What will be the net gain to the firm from adopting the new abatement technology

The problem of excess pollution mainly occurs because of O asymmetric information. O a negative externality. O a monopoly. O a positive externality.

Scenario 2. Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. The government gives each firm 20 pollution permits. Government officials are not sure whether to allow the firms to buy or sell the pollution permits to each other. Refer to Scenario 2. What is the total cost of reducing pollution if the firms are allowed to buy and sell permits from each other? if firms are not allowed to buy and sell pollution permits from each other?

Figure 8.1 shows the marginal pollution control costs per ton for a firm that would pollute at Qmax without any regulation. Suppose a pollution tax of T1 per ton were implemented, with the firm reducing pollution to Qtax. What area(s) would represent(s) the tax paid by the firm? Group of answer choices A B+C A+B A+B+C B

Marginal Abatement Costs: The marginal abatement costs of three firms are provided in the table below on page 109. Each firm is emitting now 10 tons/week. Therefore, the total emission of all firms is 30 tons/week. Suppose that society wants to reduce the level of emission by 50%, to 15 tons/week. Calculate the total cost of reducing the level of emission to 15 tons/week    Assuming equiproportionate decrease in emissions which of the following is correct: 69  96  100    Assuming equimarginal decrease in emissions which of the following is correct: 69  96  100

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7. In a market for dry cleaning, the inverse market demand function is given byP= 100- 0, and the (private) marginal cost of producbion for the aggrega- tion of all dry-cleaning firms is given by MC = 10 + Q. Finally, the pollution generated by the dry cleaning process creates external damages given by the mar- ginal external cost.curve MEC0, a Calculate the output and price of dry cleaning if it is produced under competitive conditions without regulation. b. Determine the socially efficient price and output of dry cleaning c Determine the tax that would result in a competi- live market pmducing the socially efficent output. d. Caleulate th oulput and price of dry clearing if it sproduced under monopoliklieconditions withrt regulation e Delermine the tax that would result in a moopols- ie market produring the soclally eficient outpuL

Table 10-5 The following table shows the marginal costs for each of four firms (A, B, C, and D) to eliminate units of pollution from their production processes. For example, for Firm A to eliminate one unit of pollution, it would cost $54, and for Firm A to eliminate a second unit of pollution it would cost an additional $67. Marginal Cost to Eliminate Firm (Dollars) First Unit Second Unit Third Unit Fourth Unit 54 67 82 107 57 68 86 108 54 66 82 107 D 62 73 91 11 Refer to Table 10-5. If the government wanted to eliminate exactly 7 units of pollution, which of the following fees per unit of pollution would achieve that goal? S85 $87 er $71 $74 AB