Answer:
Efficient Abatement Level = 12 million tons
Efficient Marginal Benefit & Marginal Cost = 250
Abatement > Efficient Level : Net social benefit fall ; Abatement < Efficient Level : Net Social Benefit Rise
Socially Efficient setting MB = MC rather than TB = TC , as Net Benefit [ TB - TC] is maximised when MB = MC
Explanation:
a. Socially Efficient level of output is when : Marginal Cost of Abatement = Marginal Benefit of Abatement .
MB = MC
500 - 20A = 200 + 5A
500 - 200 = 5A + 20A → 300 = 25A
300 = 25A → A = 300 / 25
A [Efficient Level of Abatement] = 12
b. Putting value of efficient A in MB & MC, we get :
MB = 500 - 20 (12) = 500 - 240 = 260
MC = 200 + 5 (12) = 200 + 60 = 260
c. If one million more abatement than efficient level is done, MC > MB & net social benefit will decrease. If one million less abatement than efficient level is done, MC < MB & net social benefit will increase.
d. Total Benefit & Total Cost are total gain & cost due to all the units of abatement. Marginal Benefit & Marginal Cost are addition to total benefit & total cost by an additional unit of abatement. Net Social Benefit is maximum when difference between TB & TC is maximum, which is so when they are parallel & their slopes MB & MC are equal.
