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Marginal Social Costs

#2) The marginal social costs and abatement costs of a certain type of air pollution for a factory are given as:

MSC = -1121 + 22.5Q
MCA = 879 - 17.5Q

Q = units of pollution per day, and MSC and MCA are measured in dollars. The Factory is located in a small town that is currently considering how to address the pollution problems. You have been hired to perform the analysis requested below.

a) If the community wishes to set a pollution standard for the factory, what daily level of pollution should be allowed? Explain your reasoning to the community.

b) As an alternative some members of the town council favor an emissions tax for the factory. If a tax is implemented, at what level should the tax be set? Be sure to include a diagram with your answer, and explain how the tax would work.

c) In general, are emissions standards or fees preferable to address the pollution externalities problem? Discuss circumstances under which fees would be preferred, and when setting a standard would result in a better social welfare outcome.

Solution Summary

The marginal social costs and abatement costs of a certain type of air pollution for a factory are examined.

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