The “demand” (MB) curve for pollution abatement would be given by the pollution damages that could be avoided by each successive unit of abatement.  There are likely to be declining marginal benefits from each additional unit of abatement.  The marginal cost of abatement is likely to start small, and then grow, yielding increasing marginal abatement costs from each additional unit of abatement. The socially efficient amount of abatement would be given by the intersection of the falling marginal benefit (avoided damages) curve and the rising marginal abatement cost curve.  However, unregulated firms can often simply ignore the damages caused by the pollution they create.    a. Illustrate the marginal private benefit curve, as perceived by the firm, if they don’t have to think about their pollution at all, and show the firm’s privately efficient amount of abatement. b. If the regulatory agency sets a standard for expected levels of abatement, and charges the firm a huge fine per unit if they abate any less (i.e. pollute more) than this standard, sketch the firm’s marginal cost of abatement curve and its perceived marginal benefit of abatement “curve” (HINT: the marginal benefit curve will be “downward-sloping” in a very lumpy sort of way.) Now what will be the firm’s privately efficient amount of abatement? c. If the regulatory agency specifies a smaller fine for every unit of pollution (call this a pollution tax per unit), then the firm’s perceived marginal benefit of abatement “curve” will reflect the amount of tax that can be avoided for each unit of abatement. Sketch the firm’s marginal abatement cost curve and this version of the perceived marginal benefit of abatement curve.  Show the firm’s privately efficient amount of abatement

The “demand” (MB) curve for pollution abatement would be given by the pollution damages that could be avoided by each successive unit of abatement.  There are likely to be declining marginal benefits from each additional unit of abatement.  The marginal cost of abatement is likely to start small, and then grow, yielding increasing marginal abatement costs from each additional unit of abatement. The socially efficient amount of abatement would be given by the intersection of the falling marginal benefit (avoided damages) curve and the rising marginal abatement cost curve.  However, unregulated firms can often simply ignore the damages caused by the pollution they create. 

a. Illustrate the marginal private benefit curve, as perceived by the firm, if they don’t have to think about their pollution at all, and show the firm’s privately efficient amount of abatement.

b. If the regulatory agency sets a standard for expected levels of abatement, and charges the firm a huge fine per unit if they abate any less (i.e. pollute more) than this standard, sketch the firm’s marginal cost of abatement curve and its perceived marginal benefit of abatement “curve” (HINT: the marginal benefit curve will be “downward-sloping” in a very lumpy sort of way.) Now what will be the firm’s privately efficient amount of abatement?

c. If the regulatory agency specifies a smaller fine for every unit of pollution (call this a pollution tax per unit), then the firm’s perceived marginal benefit of abatement “curve” will reflect the amount of tax that can be avoided for each unit of abatement. Sketch the firm’s marginal abatement cost curve and this version of the perceived marginal benefit of abatement curve.  Show the firm’s privately efficient amount of abatement.