If firm 1 and firm 2 each face an marginal abatement cost of MAC₁ = 5A₁ and MAC₂ = 3A₂, respectively, and if the combined abatement level must be 16 units, then firm 1 must abate 6 units and firm 2 must abate 10 units in order to achieve the cost-effective solution.

Question

Quizplus · Accepted Answer

To achieve the cost-effective solution, the firms must allocate abatement levels based on their marginal abatement costs until the combined abatement level reaches 16 units.

If we allocate the abatement level based on the ratio of marginal abatement costs, we get:

- Firm 1's share = (5/8) x 16 = 10 units
- Firm 2's share = (3/8) x 16 = 6 units

This allocation is not cost-effective, as Firm 1's marginal abatement cost is higher than Firm 2's, so it is more expensive for Firm 1 to abate compared to Firm 2.

Therefore, the cost-effective solution is for Firm 1 to abate 6 units (at a cost of 5 x 6 = 30) and for Firm 2 to abate 10 units (at a cost of 3 x 10 = 30), which results in a combined abatement cost of 60.

If Firm 1 and Firm 2 Each Face an Marginal