1. Suppose that a polluting activity has marginal abatement costs given by $MAC = 150 - 2E$. Suppose that the government charges an emissions tax of of $t = 60$ per unit of emissions. (a) Show that the baseline level of emissions is $E = 75$. (b) If the polluter chooses $E = 60$: i. Compute the amount of money paid to the government. ii. Compute the associated total abatement costs. (c) Find the level of emissions that minimizes the sum of abatement costs and tax payments for the polluter. (d) Verify that the total costs to the polluter are lower in part (c) than they are in part (b). (e) Assuming the polluter behaves optimally (for them), how much money would the government lose (including foregone tax revenue) by offering a subsidy of $s = 60$ instead of charging the tax of $t = 60$?
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This occurs where the marginal abatement cost (MAC) is zero. Setting $MAC = 0$, we have: $150 - 2E = 0$ $2E = 150$ $E = 75$ Therefore, the baseline level of emissions is 75. Show more…
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