1. Upcoming in Class Quiz #2 Thursday Sept. 29th
Homework #4 Due Tuesday Oct. 11
Exam #2 Tuesday Oct. 11
Writing Assignment Due Oct. 27th

2. Marginal Costs of Pollution Damage and Control
Total Cost of Pollution? Total Cost of Pollution Control??

3. 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?

4. Cost-Effective Allocation of a Uniformly Mixed Pollutant

5. 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

6. 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

7. Suppose a tax of $30 is implemented instead
What is the control cost to each firm?
What is the revenue to the government?

8. Emission Charges
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.

9. A Per-Unit Charge for Pollution Emissions

10. 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.

11. 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

12. 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?

13. 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.

14. 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.

15. 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?

16. 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