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Chapter 5- Pt 2.docx

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ECON 3220
Ali Kamar

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Chapter 5- Part 2 Efficient abatement using equal marginal principle  Total cost of achieving a emission reduction target is minimized if marginal abatement costs are equalized for all firms/emitters. o Consider two firms:  Each emits 15 units, total 30  Reduction target (E = 15 units)  Firm 1: Emissions are read from left to right  Reductions are read from right to left  Firm 2: Emissions are read from right to left.  Reductions are read from left to right Efficient abatement by two firms  Step 1: Find vertical and horizontal intercepts of the two MAC curves  Step 2: Draw MAC sh1wing MAC values on the y-axis and its emissions on the x-axis so o Firm 1’s emission will be read from left to right. o Reduction will be right to left  Step 3:Draw a second vertical axis E units apart, E being the emission reduction target  Step 4: Draw MAC on 2he second vertical axis showing its emission from right to left so firm 2’s reduction will be read from left to right  Step 5: Find the intersection of the 2 MAC’s where MAC =M1C . Th2s will give efficient abatement E 1 and E *2 Class exercise #1: Efficient abatement  Problem: Assume (i) Problems are uniformly mixed which cause same level of damage to the environment regardless of the location of emission, and (ii) Firms differ in their ability to reduce emissions  We want to find out how much each firm should emit or abate such that a pre-specified total emission reduction target is achieved at the minimum cost  Objective: Find efficient abatement to minimize the total cost to society of achieving a pre-specified emission reduction target  Efficient or opt. Condition: Equal marginal principle  Suppose there are only two firms and their different ability to reduce emissions is reflected in their MAC curves: o MAC = 100=10E 1 o MAC = 250-10E and 2he emission reduction target is E=25  Find E 1 , E2* and them minimum cost of abatement o GRAPHICAL SOLUTI
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