• Draw a correctly labeled graph showing the MSC and MSB of pollution. Assume that all pollution costs are external. On your graph, show the market quantity of pollution if there is no government intervention and the efficient quantity of pollution

Explain: “Without a market for pollution rights, dumping pollutants into the air or water is costless; in the presence of the right to buy and sell pollution rights, dumping pollutants creates an opportunity cost for the polluter.” What is the significance of this opportunity cost to the search for better technology to reduce pollution?

No hand written solution Afirm has an industrial plant that emits pollutants into a town’s lake. The plant’s marginal abatement function is MAC= 200 – 0.5E and damages caused by its emissions are given by MD = 2E where emissions are in kg. per day. What is the socially efficient level of emissions from this plant? Illustrate this in a graph.   As an incentive to reduce emissions to the socially efficient level, government offers to pay the firm for each kg. of emissions it abates per day from this plant.   What subsidy per kg. should the government offer? If the plant abates to the socially efficient level of emissions, what total subsidy payment would the firm receive? Identify the area in your graph. How much better or worse off would the firm be compared to if it did no abating? Identify the area in your graph. What would be the net benefit to society if we pay the firm to reduce the plant’s emissions to the socially efficient level? Identify this area in your graph.

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