Suppose a farm that is polluting an underground water supply faces the following marginal costs for abating units of pollution: 1st unit abated,MC = $250
2nd unit abated,MC = $400
3rd unit abated,MC = $650
4th unit abated,MC = $950
The marginal benefit to society from this farm abating units of pollution are as follows:
1st unit abated,MB = $1000
2nd unit abated,MB = $800
3rd unit abated,MB = $650
4th unit abated,MB = $300
What is the total net benefit to society if this farm engages in the socially optimal amount of pollution abatement?

Question

Quizplus · Accepted Answer

To find the socially optimal amount of pollution abatement, we need to set the marginal cost of abatement equal to the marginal benefit of abatement.

For the first unit of abatement, the marginal cost is $250 and the marginal benefit is $1000, so it is beneficial for society to abate the first unit of pollution.

For the second unit of abatement, the marginal cost is $400 and the marginal benefit is $800, so it is beneficial for society to abate the second unit of pollution.

For the third unit of abatement, the marginal cost is $650 and the marginal benefit is $650, so it is still beneficial for society to abate the third unit of pollution.

For the fourth unit of abatement, the marginal cost is $950 and the marginal benefit is $300, so it is not beneficial for society to abate the fourth unit of pollution.

Therefore, the socially optimal amount of pollution abatement is three units, which brings a net benefit of $1150 to society ($1000 + $800 + $650 - $250 - $400 - $650 = $1150).

Suppose a Farm That Is Polluting an Underground Water Supply