Based on the figure above, answer the following questions:
1. Solve for the socially efficient emission level in the urban area (E*U) and in the rural area (E*R).
2. What are the respective marginal abatement costs - (MACU) and (MACR) - at the socially efficient level of emissions?
3. If the Department of Health and Natural Resources (DENR) imposes a uniform standard at the emission level midway between the two socially efficient levels of emissions, explain why this uniform standard will not be efficient. You can use computations showing changes in total damages (TD) or total abatement cost (TAC) in each area compared to socially efficient damages to support your answer.
Location (modified from Field and Olewiler, p. 212):
MDu is higher than MDg because many people live here and more will be affected, health-wise, by emissions. MAC is the same. A single, uniform standard is not socially efficient since if it is set at Eu, it will be 'overly stringent' for the rural area. If it is set at ER, it will be lax for the urban area. Setting individual standards at MAC=MD is efficient but requires more info and is difficult to enforce.
PHP
MDurban
600 MAC
MDRural
500
400
-
300
I
200
100
- - - -- 20 40 Eu ER
0
120 Emissions of CO (kg per month) 168