ECON 3340 Lecture Notes - Micro-Star International, Watt, Economic Surplus
13 May 2012
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Chapter 12 #1 (a) + (b) see figure below. Its derivation and an explanation follow in part (c). (c) it i s straightforward to calculate aggregate marginal damage. Since pollution is non- rival, aggregate damage is the vertical sum of the individual marginal damage functions: M d = m d i+ m d 2= e + e = 2 e. Industry aggregate marginal savings is slightly more complicated. This will require a horizontal summation of marginal savings curves, and the answer to this question depends on how emissions are distributed among the firms. Efficiency would suggest that this distribution take place as to maximize total savings. The necessary condition for this is the equimarginal principle: marginal savings should be equated across firms to maximize savings from pollution (minimize total costs of abatement). This is the effective aggregate level marginal savings function when emissions are distributed cost effectively.
