Sweet Steel and Molten Metal produce sulfur dioxide emissions during production.
ID: 1128289 • Letter: S
Question
Sweet Steel and Molten Metal produce sulfur dioxide emissions during production. The total abatement cost (TAC) and marginal abatement cost (MAC) for each company: Sweet Steel: TAC,-100,000 + 1 es: MAC,-2es Molten Metal: TCM= 100,000 + 1.5e2. MACM= 3eM where es and ew represent tons of sulfur dioxide emissions eliminated by each company Suppose the government wants to eliminate 1,000 tons of sulfur dioxide emissions by issuing tradable pollution permits to each firm. What is the total cost (TACs+TACM) of reducing emissions by 1,000 tons? A) $800,000 B) S430,000 C) S280,000 D) S625,500 11.Explanation / Answer
TAC for both companies is the sum of abatement costs of both companies
TAC= TACS+ MACS= 100,000 + 1eS2 +100,000 + 1.5eM2
TAC=200 ,000 + 1eS2 + 1.5eM2
The optimal abatement point is where the marginal abatement costs of both firms are equal i.e. MACM=MACS
2eS=3eM
eS= 1.5eM
Substituting in TAC,
TAC= 200,000+ (1.5eM)2 + 1.5eM2
= 200,000+ 2.25eM2 + 1.5eM2
= 200,000+ 3.75eM2
Since we want to reduce pollution by 1000 tons, eS+eM=1000
1.5eM+eM=1000
2.5eM= 1000
eM= 400
Substituting in TAC,
TAC= 200,000+ 3.75eM2
= 200,000+600,000
=800,000
Answer is (a)800,000
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