What information does the government need to support an assertion that the 20-unit abatement standard is allocatively efficient?
Assume that there are two firms, each emitting 20 units of pollutants into the environment, for a total of 40 units in their region. The government sets an aggregate abatement standard (AST) of 20 units. The polluters' cost functions are as follows, where the dollar values are in thousands:
Polluter 1: TAC1 = 10 + 0.75(A1)2, Polluter 2: TAC2 = 5 + 0.5(A2)2, MAC1 = 1.5A1, MAC2 = A2.
For allocative efficiency to be achieved in this region, it must be the case that the MSC and MSB of pollution abatement are equal at the 20-unit level. Thus, in addition to knowing the marginal social benefit (MSB) for each region, the government must also know the MAC of each polluter and the government’s marginal cost of enforcement (MCE), since MSC = MACmkt+ MCE.
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