Assume we define the market as air quality. For simplicity, assume Texas has two oil and gas companies, Company 1 and Company 2. Company 1 emits 10 units of air pollution and Company 2 emits 20 units of air pollution. The government sets the optimal abatement standard at 10 units or Ast=10. The firm's marginal abatement cost functions are given as follows: MAC1= 16+0.5A1 MAC2= 10+2.5A2

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Assume we define the market as air quality. For simplicity, assume Texas has two oil and gas companies, Company 1 and Company 2. Company 1
emits 10 units of air pollution and Company 2 emits 20 units of air pollution. The government sets the optimal abatement standard at 10 units or
Ast=10. The firm's marginal abatement cost functions are given as follows:
MAC1= 16+0.5A1
MAC2= 10+2.5A2
If the government sets an effluent fee of $18 per unit of pollution, Firm 1 abates
• units and Firm 2 abates
* units. As a result, the
firms
• abate relative to the optimal abatement standard.
Instead, how should the government set the tax to achieve the optimal abatement standard of Ast=10.
Answer:
Transcribed Image Text:Assume we define the market as air quality. For simplicity, assume Texas has two oil and gas companies, Company 1 and Company 2. Company 1 emits 10 units of air pollution and Company 2 emits 20 units of air pollution. The government sets the optimal abatement standard at 10 units or Ast=10. The firm's marginal abatement cost functions are given as follows: MAC1= 16+0.5A1 MAC2= 10+2.5A2 If the government sets an effluent fee of $18 per unit of pollution, Firm 1 abates • units and Firm 2 abates * units. As a result, the firms • abate relative to the optimal abatement standard. Instead, how should the government set the tax to achieve the optimal abatement standard of Ast=10. Answer:
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