The Graph below illustrates a Power plant (Greenstar energy) emitting S02, and t

Question

The Graph below illustrates a Power plant (Greenstar energy) emitting S02, and the costs it faces to control the emission of this (its MAC curve). There are dozens of similarly sized power plants to this operating in the region, and the Environmental Agency wants to use Emlssion charges Taxes) to control the S02 pollution. It therefor sets an Emission charge of $50 for each ton gf SQ2emission, MAC1 represents Greenstar's initial MAC curve. 2) $Letter A 80,000 D 200,000 B 100,000 E 250,000 Letter MAC C 50,000 50 10 18 Emissions in thousands of tons/year A) How much Polution does Greenstar emit fit dfes no polltion contrel hio Government control)? B) If Greenstar energy initially has average Abatement costs for the industry (MAC1), what is it likely to do based on the $50/ton of S02 Emissions charge? So what is the amount of s02 it cleans up-what amount of Emissions does it emit? Briefly Explain why? Print Layout View Sec Pages: 3 of 6Words: Sec-li Pages: 3 of 6 | Words: 0 of 1073L 0 of 1073

Explanation / Answer

A), As we can see that initially the marginal cost of abating is MAC1 and it is “0” at E=18, => without any control “Greenstar” will emit 18 thousands of tons.

B). Now, if a emission fee will be charged of amount $50/tons, then the optimum emission will be “E=10” where MAC1=50 condition will be satisfied. So, “Greenstar” will clean up “18-10=8” tons of emission.

Now, if “greenstar” will emit more than 10, => MC > MAC, => it is optimum to reduce the emission, on the other hand if MC < MAC, => it is optimum to increase emission, => the optimum level of emission is at E=10.

C). Now, because of the emission fee the optimum emission is E=10, => total emission cost is “e+d+c”. So, under this situation “Greenstar” will clean up 8tons, => the reduction cost is the area under the MAC curve from “10 to 18”. SO, the abating cost is, “a+b”.

Now, the “total emission charges” is “e+d+c” numerically “250,000 + 200,000+50,000=5,00,000”. Now, “total cost” the sum of “clean up cost” and “emission cost”, “a+b” and “c+d+e” respectively. So, numerically the fig is “80,000+100,000=180,000” and “5,00,000”, => total cost is “6,80,000”

D). So, initially the MAC was MAC1 now it is possible to reduce the MAC to MAC2 through extensive R&D. So, under this situation given the emission fee the optimum emission reduced to “5”, => the reduction of the total cost be “c+a”. So, as the “total cost” falls by “a+c”, there is an incentive to reduce the MAC through R&D.

We can also represent the fig numerically, “a+c=80,000+50,000=1,30,000”.

E). Suppose that the initially the optimum emission is “E=18” now as the emission fee will be charged the optimum emission reduced to “E=10”. Now, under this situation if the firm reduce the MAC through R&D. So, the total cost reduction is “a+c”, => here under the case of emission charge the incentive is “a+c”.

Now, let’s assume that there is a “emission standard” of level “10”, => any how the firm have to reduce the emission at E=10. So, under this situation if the firm reduce the MAC to MAC2 then the “total cost “ reduction will be “a”, => here the incentive is “a”, => there the incentive to reduce MAC is low compared to the emission fee.

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