Principles of Microeconomics / Unit 11 MIC 1008 worked example, 60 to 90 seconds
The Abatement Decision Under a Tax
The idea
Given a schedule of the cost of abating successive lots of pollution and a tax per lot, compare lot by lot. Abate each lot whose abatement cost is below the tax; pay the tax on each lot whose abatement cost exceeds it. Total outlay is abatement cost incurred plus tax on what is still emitted. Then state the rule: abate until the marginal cost of abatement equals the tax. A firm with cheap abatement abates more; one with dear abatement pays more.
In practice
Worked example: a plant emits five hundred pounds a week, and abating successive hundred-pound lots costs two hundred, four hundred, seven hundred, eleven hundred and eighteen hundred dollars. With a tax of eight hundred dollars a lot, the first three lots are cheaper to abate than to pay for, so the plant abates three hundred pounds at a cost of thirteen hundred and pays sixteen hundred in tax on the remaining two hundred. A second plant whose lots cost three hundred, nine hundred and more abates one lot and pays tax on four.
Where people slip
The tax does not aim at zero pollution; it aims at cheap abatement, and the last two lots are left because preventing them costs society more than they damage, if the tax is set right. And do not compare the tax with average abatement cost; it is the marginal lot that decides.
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