Upcoming in Class Quiz #2 Thursday Sept. 29th

Homework #4 Due Tuesday Oct. 11 Exam #2 Tuesday Oct. 11

Writing Assignment Due Oct. 27th

Marginal Costs ofPollution Damage and Control

Example – Polluting Sources

Coal Power Plant 15 tons of CO2

• Natural Gas Power Plant

• 15 tons of CO2

• Suppose we determine that to maintain clean healthy air, we need to reduce emissions by 15 tons total.

• Who should reduce emissions? By how much?

Cost-Effective Allocation of a Uniformly Mixed Pollutant

Cost-Effective Allocation Minimizes the control cost between

the two sources Cost Effectiveness Equimarginal

Principle• Cost of achieving a given level of reduction

is minimized when• MC1=MC2=MC3=..=MCX

• Marginal costs of all emitters are equal

Example – 2 Emitters MCcoal = 6 + 1/3 * Qcoal-control

MCng = 2 + Qng-control

Each firm currently emits 100 tons of CO2

The government wants the to reduce overall emissions to 140 tons of CO2

Qcontrol = Qcoal-control + Qng-control

Suppose a tax of $30 is implemented instead

What is the control cost to each firm?

What is the revenue to the government?

• An emission charge is a per-unit of pollutant fee, collected by the government.

• Charges are economic incentives. • Each firm will independently reduce

emissions until its marginal control cost equals the emission charge. This yields a cost-effective allocation

• A difficulty with this approach is determining how high the charge should be set in order to ensure that the resulting emission reduction is at the desired level.

Emission Charges

A Per-Unit Chargefor Pollution Emissions

Practice Problem Two power plants are currently

emitting 8,000 tons of pollution each. Control costs for the two plants are• MCC(1)= 2Q• MCC(2)= 3Q

Q represents the quantity of pollution reduction.

Calculate the control cost for the firm, total control cost, government revenues, and total pollution reduction for the following two scenarios.

Regulation requiring, each plant to control 5,000 tons

A tax of $1200 per ton

A New Technology Suppose a new technology is

discovered that can control pollution at a lower cost.

Both firms adopt this technology. MCC=1.5 Q What is the effect of the tax now on

MC, the efficient level of Control, Total Control Cost, and Government Revenue?

A Transferrable Pollution Permit System

Firms are allocated X number of permits

A permit represents the right to pollute 1 ton of SOx.

Firms can buy and sell permits. But firm sells their permits, they can no longer pollute and must control their pollution instead.

Permit System Assume the MC were as before the

technology. A transferable permit system in

which permits for emission of 6,000 tons of pollution are issued (3,000) to each plant.

Permit System Which firm buys permits? Which firm sells permits? How many permits are traded? At what price? What is the total control cost for firm 1? What is the total control cost for firm 2? What is the total cost of pollution for firm

1? What is the total cost of pollution for firm

2?

Upcoming in Class Quiz #2 Next Thursday Sept. 29th

Homework #4 Due Tuesday Oct. 11 Exam #2 Tuesday Oct. 11

Writing Assignment Due Oct. 27th