Suppose the combined abatement standard is set at 22 units and firm J and firm K have MAC functions of MAC_J = 0.5A, and MAC_K = 0.75A, respectively. If firm J is abating 10 units and firm K is abating 12 units, firm K should abate more units and firm J should abate less.

Question

Quizplus · Accepted Answer

To determine the optimal allocation of abatement between two firms, we need to compare their marginal abatement costs (MACs) and allocate reductions in a way that equalizes their marginal costs. If both firms are currently abating less than the combined abatement standard and have different MACs, the firm with the lower MAC should abate more while the firm with the higher MAC should abate less. In this case, firm J has a MAC of 0.5A while firm K has a MAC of 0.75A. Therefore, firm K should abate more units than firm J to achieve the efficient allocation and equalize their marginal costs. Therefore, the statement is true.

Suppose the Combined Abatement Standard Is Set at 22 Units