Regulators are considering controlling the emissions from two local power

QUESTION

(50 pts.) Regulators are considering controlling the emissions from two local power plants. Themarginal benefits (the demands for effluent) derived by these plants from being able to producea given quantity of effluent are 10,000-Q1 for the first plant and 10,000-2*Q2 for the secondfacility (where Q1 and Q2 are the quantities of effluent).a. (10 pts.) Graph these two individual pollution demand curves and indicate the levels ofpollution (both graphically and numerically) that will be produced by these plants in theabsence of regulation.b. (5 pts.) Find the total demand function for effluent implied by these two individual firmdemand functions and add it to the graph above.c. (10 pts.) Suppose that the damage from the effluent is MC=1*(Q1+Q2)=Q. Add thisfunction to the graph in part (a). What is the efficient level of effluent?d. (5 pts.) Regulators are considering a policy that obligates each plant to limit itsemissions to half of the efficient level of total pollution you found in the previousquestion. Illustrate this policy on a new graph and calculate the total control(abatement) costs of this policy.e. (10 pts.) Acting as a consultant to regulators, you suggest that an alternative might be toimpose a tax on each unit of effluent. What would the tax be if it were set at the levelto achieve the efficient total amount of effluent? How much effluent would beproduced by the two firms?f. (10 pts.) Calculate the abatement costs under the tax policy and compare their total tothat achieved under the command and control policy in (d). Which policy is more costeffective? Why do you expect this finding to be true in general?

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