Farmers Al and Bob each operate a farm in the same Each farm uses water and fertilizer to produce both crops and polluted runoff (from nutrients in the fertilizer). Below are the marginal cost equations for abating (i.e., reducing) polluted runoff on each farm (you may find it helpful to think of these as marginal cost functions for “producing” abatement): Al’s marginal cost of abating runoff ($/unit) = 3 × Units of runoff abated by Al Bob’s marginal cost of abating runoff ($/unit) = 5 × Units of runoff abated by BobCurrently, Al and Bob each produce 20 units of polluted runoff (a total of 40 units) and neither abates any runoff. Suppose the local environmental protection agency wants to reduce the total amount of polluted runoff generated by Al and Bob to 20 units. In other words: Units of runoff abated by Al + Units of runoff abated by Bob = 20. Unfortunately, Al and Bob have a lot of political clout and won’t submit to any regulations or penalties that force them to reduce their pollution levels. So instead, the agency offers to pay them for their abatement expenses (this is commonly known as an “abatement subsidy”). Draw (for yourself) the marginal abatement cost curves for Al and Bob, with “units of runoff abated” on the horizontal axis and “marginal cost” on the vertical axis. How do the curves look like? The two lines start from the origin with slopes of 3 and 5 for Al and Bob, respectivelyThe two lines are flat with respect to the horizontal axis with intercepts of 3 and 5 for Al and Bob, respectively To achieve its goal, suppose the local agency asks Al and Bob to abate 10 units each and offers to pay their total abatement What is the total cost to the agency? a.400b.300c.250 Considering Al’s and Bob’s marginal abatement costs in part (II), has the agency achieved its abatement goal at the lowest possible cost? Why or why not? Yes, because the Equimarginal Principle was satisfiedNo, because the Equimarginal Principle was not satisfiedYes, because the pollution level was reducedNo, because the pollution level was not reduced enough Using the Equimarginal Principle, determine the allocation of pollution abatement between Al and Bob that will achieve the agency’s goal at the lowest possible cost. How much will each farmer abate? What will be the agency’s total expenditure? Units abated by Al and Bob 5 and 12.5; Agency total Cost $400Units abated by Al and Bob 5 and 7.5; Agency total cost $375Units abated by Al and Bob 10 and 10; Agency total cost $355 If the total social benefit (WTP) for 20 units of abatement is $390, does the Equiproportionate Approach in part (II) improve social welfare? What about the Equimarginal Approach in part (IV)? Assume the agency’s total expenditure equals the social opportunity cost of abatement. For TB=390 Equiproportionate Approach doesn’t improve social welfare but Equimarginal Approach does improveFor TB=390 Equiproportionate Approach improves social welfare but Equimarginal Approach doesn’t improveFor TB=390 none of the approaches improve social welfare because total cost is too high

Marginal cost: The additional cost in total production cost which adds up from producing one more…

Answered: Draw (for yourself) the marginal…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter11: Profit Maximization

Section: Chapter Questions

Problem 11.4P

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Farmers Al and Bob each operate a farm in the same Each farm uses water and fertilizer to produce both crops and polluted runoff (from nutrients in the fertilizer). Below are the marginal cost equations for abating (i.e., reducing) polluted runoff on each farm (you may find it helpful to think of these as marginal cost functions for “producing” abatement):

Al’s marginal cost of abating runoff ($/unit) = 3 × Units of runoff abated by Al Bob’s marginal cost of abating runoff ($/unit) = 5 × Units of runoff abated by Bob

Currently, Al and Bob each produce 20 units of polluted runoff (a total of 40 units) and neither abates any runoff. Suppose the local environmental protection agency wants to reduce the total amount of polluted runoff generated by Al and Bob to 20 units. In other words:

Units of runoff abated by Al + Units of runoff abated by Bob = 20.

Unfortunately, Al and Bob have a lot of political clout and won’t submit to any regulations or penalties that force them to reduce their pollution levels. So instead, the agency offers to pay them for their abatement expenses (this is commonly known as an “abatement subsidy”).

Draw (for yourself) the marginal abatement cost curves for Al and Bob, with “units of runoff abated” on the horizontal axis and “marginal cost” on the vertical axis. How do the curves look like?

The two lines start from the origin with slopes of 3 and 5 for Al and Bob, respectively
The two lines are flat with respect to the horizontal axis with intercepts of 3 and 5 for Al and Bob, respectively

To achieve its goal, suppose the local agency asks Al and Bob to abate 10 units each and offers to pay their total abatement What is the total cost to the agency?

a.	400
b.	300
c.	250

Considering Al’s and Bob’s marginal abatement costs in part (II), has the agency achieved its abatement goal at the lowest possible cost? Why or why not?

Yes, because the Equimarginal Principle was satisfied
No, because the Equimarginal Principle was not satisfied
Yes, because the pollution level was reduced
No, because the pollution level was not reduced enough

Using the Equimarginal Principle, determine the allocation of pollution abatement between Al and Bob that will achieve the agency’s goal at the lowest possible cost. How much will each farmer abate? What will be the agency’s total expenditure?

Units abated by Al and Bob 5 and 12.5; Agency total Cost $400
Units abated by Al and Bob 5 and 7.5; Agency total cost $375
Units abated by Al and Bob 10 and 10; Agency total cost $355

If the total social benefit (WTP) for 20 units of abatement is $390, does the Equiproportionate Approach in part (II) improve social welfare? What about the Equimarginal Approach in part (IV)? Assume the agency’s total expenditure equals the social opportunity cost of abatement.

For TB=390 Equiproportionate Approach doesn’t improve social welfare but Equimarginal Approach does improve
For TB=390 Equiproportionate Approach improves social welfare but Equimarginal Approach doesn’t improve
For TB=390 none of the approaches improve social welfare because total cost is too high

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