1. Suppose economists estimate the following cost and benefit functions associated with the 1990 Clean Air Act.
TB = 75A – 0.4A2
TC = 8A + 0.65A2
MB = 75 – 0.8A
MC = 8 + 1.3A
where A represents the percent of pollution abatement, and costs and benefits are measured in millions of dollars.
a. Find the TB, TC, and net benefit associated with an abatement standard of 40.
TB= 2,360 or 29.936 TC=1,360 or 3.304
b. Based on the information in (a) alone, can you state definitively whether this abatement level is efficient? Explain.
c. Find the efficient level of pollution abatement A*. Show your work.
2. With few exceptions, automobile emissions standards are imposed uniformly under the Clean Air Act, which leads to an inefficient outcome. Suppose a uniform abatement standard (A) has been set for PM10 (particulate matter less than 10 micrometers in diameter) at 40 units of abatement. Also assume that the following are the MC and MB for New Jersey (NJ) and Montana (MT), where each is measured in millions of dollars. In this case, MC is the same for both states because cost of mobile source abatement is not location specific.
MBNJ = 65 – 0.2A
MBMT = 40 – 0.25A
MC = 17 + 0.4A
a. Evaluate the MB and MC for each region at the uniform abatement standard.
b. What do the relative values imply about the over- or under-regulation for each region based on comparison of MB and MC at a standard of 40?
c. Support your result in part (b) by comparing the uniform standard to the efficient abatement level for each state. Show your calculations of the efficient levels. Round to the nearest whole number for abatement.
d. GRAPH the MC and both MB curves in a single graph. Clearly label y-intercepts and indicate the efficient level of abatement for each state.