The marginal damage cost equation for carbon monoxide (CO) in urban areas is equ
ID: 1106221 • Letter: T
Question
The marginal damage cost equation for carbon monoxide (CO) in urban areas is equal to: MDu 20E The marginal damage cost equation for CO in rural areas is equal to: MDR-8E The marginal abatement cost equation for CO is equal to: MAC-600-4E (1) Is there a uniform standard for carbon monoxide emissions that can be socially efficient in both urban and rural areas? Very briefly explain why or why not. (2) What are the socially efficient individual standards for carbon monoxide? What is the total abatement cost in each area under this scheme? Hint: The reference can be found from Figure 11-3 and Figure 11-4)Explanation / Answer
1) Socially efficient level of output is where Marginal Social Benefit = Marginal Social Cost
Marginal Social Benefit = Marginal Social Cost
If a good has negative externality,ignored by individuals, then in a free market we tend to get overconsumption of such goods and there is social inefficiency.
So in ths case,as Carbon Monoxide has negative externality, there cannot be any social efficeincy in this case.
2) Socially efficient individuals standards for Carbon Monoxidein Rural Areas
where MD = MAC
8E = 600- 4E
8E + 4E = 600
12E = 600
E = 50
Urban Areas
MD = MAC
20E = 600 - 4E
20E + 4E = 600
24E = 600
E = 25
Abatement COst in Rural Areas
MAC = 600 - 4*50
600 - 200
= 400
Abatement Cost in Urban Areas
MAC = 600- 4E
600 - 4*25
600 - 100
= 500
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