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.

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Chapter1: Making Economics Decisions
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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
MC (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.
Transcribed Image Text: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 MC (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.
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