Answer to Question #277187 in Microeconomics for shivani

Question

1.     Suppose that under the United States-Canada Air Quality Agreement, both countries agree to a combined 30 percent SO₂ abatement standard. Further assume that the following SO₂ abatement cost functions have been estimated by each country:

 

                                              TAC_US = 500 + 1.5(A_US)²

                                              MAC_US = 3 A_US

 

                                              TAC_CAN = 1000 + 3(A_CAN)²

                                              MAC_CAN = 6 A_CAN

 

where A_US and A_CAN represent the percent of SO₂ abatement achieved by the United States and Canada, respectively, and each TAC and MAC is measured in millions of dollars.

A.     If the countries implement a uniform abatement standard, find the resulting values of TAC and MAC for each nation. Based on these values, is there an economic incentive the two nations to participate in an emissions trading program? Explain. (10 marks)

B.     

 

 

 

Answer 1

If uniform abatement gets implemented then each country abates half of the total tangeted abatement standard which is;$\frac{30\%}{2}=15\%$

At such standard, the TAC and MAC of each country:

US:

$TAC_{US}=500+1.5(A)^2$

$=500+1.5(15)^2$

$=837.5$

$MAC_{US}=3(A)=3(15)$

$=45$

CANADA:

$TAC_{CAN}=1000+3(A)^2$

$=1000+3(15)^2$

$=1675$

$MAC_{CAN}=6(A)=6(15)$

$=90$

As seen above, the marginal cost of both countries are not equal at uniform abatement standard therefore implying that one country incurs a higher cost than the other in the same abatement thus inefficiency occurs and produces incentives for countries to participate into emission trading program