Consider the problem of carbon dioxide emissions. We will abstract from the comp

Question

Consider the problem of carbon dioxide emissions. We will abstract from the complexity of the problem slightly, assuming there are polluters and consumers in two regions, the OECD (O) and the rest of the world (R). Suppose the marginal cost of controlling CO2 emissions is $13 per ton. Let the marginal willingness to pay for pollution reduction be 14 - Q for region O and 8 - 2Q for region R, where Q is the amount of pollution reduction.

The United Nations is considering two proposed methods for controlling CO2 emissions, both involving polluters paying for the damage they cause.

Proposal A involves the polluters paying damages to each region for the pollution generated.

Proposal B involves the polluters in each region independently negotiating pollution reductions with the consumers of their respective region, assuming the other region is not undertaking pollution reduction.

a) Graph the marginal abatement cost and the total marginal willingness-to- pay schedules. What is the socially efficient level of emissions reduction Q*? (Hint: CO2 emission reduction is a global public good)

Explanation / Answer

Abatement is the total reduction in toxic emissions; Marginal Abatement Cost (MAC) reflects the cost of one additional unit or ton of pollution that is abated, or not emitted. Because of the low cost of initial abatement, the heaviest polluting firms also tend to be the largest contributors to the reduction in pollution. This characteristic of the program, combined with the banking for future use provision, can lead to significant pollution abatement right at start up.

total marginal willingness-to- pay schedules

MARGINAL WILLINGNESS TO PAY REGION O

14-1=14

socially efficient level of emissions reduction Q*

MB=MC

13=14-Q+8-2Q

13=22-3Q

3Q=22-13

Q=9/3

=3 units

units

MARGINAL WILLINGNESS TO PAY REGION O

1

14-1=14

2 14-2=12 3 14-3=11 4 14-4=10 5 14-5=9 6 14-6=8 7 14-7=7 8 14-8=6 9 14-9=5 10 14-10=4 11 14-11=3 12 14-12=2

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