Based on your answer to part (a), is there an economic incentive for the sources to participate in the trading program? Explain briefly.
Suppose two point sources are discharging phosphorus into Wisconsin’sFox River and face the following abatement costs for this pollutant:
Point Source 1: TAC1 = 500 + 0.35(A1)2
MAC1 = 0.7A1
Point Source 2: TAC2 = 750 + 1.05(A2)2
MAC2 = 2.1A2,
where A1 and A2 represent the abatement of phosphorus effluents in pounds by Source 1 and Source 2, respectively, and TAC and MAC are measured in hundreds of dollars.
Assume that the state environmental authority has set the total maximum daily load (TMDL) for the Fox River. To achieve this limit, 40 pounds of phosphorus must be abated across the two point sources. Use this information to answer the following questions.
With a uniform abatement standard, the MAC values are unequal across the two sources, which means that the outcome is not cost-effective. Therefore, cost savings could be realized by changing this abatement allocation through the use of a trading program. Because the value of MAC1 is lower than the value of MAC2, Point Source 1 should do more of the abating, and Point Source 2 should abate less.
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