Imagine a waste processing plant that is causing air pollution (measured in tons per year), and has marginal abatement costs given by MAC1 = 100 – 0.005E1. The marginal damages from the pollution is given by MD = 0.003E. The government establishes liability laws and a judge rules that the town must be compensated for total damages.
(a) What level of emissions will the waste plant choose?
(b) Accurately graph the MAC/MD.
(c) The polluter has the opportunity to adopt new abatement technology that would lower its costs to MAC2 = 60 – 0.003E2. Calculate their incentive to adopt the new technology? Show their incentive on the graph.
(d) Imagine that the new technology costs $800,000 (t=0). Also imagine that the new technology provides benefits (calculated in part (c)) for 5 years starting immediately (t = 0, 1, ..., 4). Will the company adopt the new technology? Discount rate is 4%