Suppose that the state of Connecticut is attempting to set a water quality stand

Question

Suppose that the state of Connecticut is attempting to set a water quality standard, where water quality is measured as percent of mercury abated (A), the marginal social benefit (MSB) and marginal social cost (MSC) of abatement has been estimated as follows:

MSB = 40 – 0.1A

MSC = 36 + 0.25A

The state’s department of environmental protection sets the standard at 20%.

a) Is this standard set efficiently, too stringently, or too leniently? (Explain your reasons toughts)

b )If this abatement level is not equilibrated then what is the equilibrium point in terms of %abated and monetary equilibrium.

Explanation / Answer

(1) Equating MSB with MSC:

40 - 0.1A = 36 + 0.25A

0.35A = 4

A = 11.43%

The department has set the standard at 20%, which is much higher than the socially optimal abatement percent of 11.43%. So the current standard is too stringent.

(2) As shown above, the equilibrium % of abatement is 11.43%.

At A = 11.43%,

MSB = 40 - (0.1 x 11.43) = 38.86

MSC = 36 + (0.25 x 11.43) = 38.86

MSB = MSC which is optimal.

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