ASSIGNMENT 4 SOLUTION

1. One can take points to the right or left of e* and show diagrammatically that the total social costs in
either case would be higher than they are at e*.

2. With an equiproportioante reduction, each firm would be reduced to 5 tons of emissions. The total
costs of doing this for each firm would be

Firm 1: $60 (0 + 4 + 8 + 12 + 16 + 20)

Firm 2: $21 (0 = 1 + 2 + 4 + 6 + 8)
Firm 3: $15 (0 + 1 + 2 + 3 + 4 + 5)

Thus, aggregate abatement costs for an equiproportioante reduction would be $96.

To meet the 15 tons total emissions and satisfy the equimarginal rule we reduce Firm 1 to 8 tons,
Firm 2 to 5 tons, and Firm 3 to 2 tons. Total emissions would be 15 tons, and each firm would have
marginal abatement costs of $8. Aggregate costs would be $69, calculated from:

Firm 1: $12 (4 + 8)
Firm 2: $21 (0 = 1 + 2 + 4 + 6 + 8)
Firm 3: $36 (0 + 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8)

So the cost saving would be $96 - $69 = $27