Answer to Question #74879 in Microeconomics for Sylvestis

Question

Government is working on a policy to reduce greenhouse gas emissions (GHG) from two
coal fired generation plants. Generation technology differs between the two plants
resulting in the marginal abatement cost functions (reducing GHG) that differ.

MC1 = q1
MC2 = 2q2

Assume that the government wants to reduce GHG emissions by 30.

a. If the emission reduction target is 15 units for each plant; is the target achieved? Is
the total cost of emission reduction minimised?

b. Now assume that government considers a polluter pays tax of $15 on every unit of
GHG emitted. Will the $15 tax achieve the target of 30 units reduction?

c. What is the cost minimising level of emissions reduction for each plant that
achieves the target reduction of 30 units?

d. Illustrate the above results in a suitably labelled graph.