Handout on Equimarginal Principle

Let a firm have two plants: Plant A and Plant B. The table below shows marginal abatement costs (MACs) of reducing pollution in the two plants.

 

Quantity of Emission Reduction

MAC of Plant A

$

MAC of Plant B

$

1

0.60

0.70

2

0.65

0.75

3

0.70

0.80

4

0.80

1.00

5

0.90

1.15

6

1.00

1.35

 

According to the equimarginal principle,

  1. if total targeted reduction of pollution is 10 units, the total cost minimizing allocation of abatement should be 6 units in Plant A and 4 units in Plant B, with MACs of $1.00 in both plants;
  2. if total targeted reduction of pollution is 7 units, the total cost minimizing allocation of abatement should be 4 units in Plant A and 3 units in Plant B, with MACs of $0.80 in both plants.

 

We can tabulate the cost-effective MAC schedule of this firm, see below.

 

Quantity of emission reduction

1

2

3

4

5

6

7

8

9

10

11

12

Cost-effective MAC, $

0.60

0.65

0.70

0.70

0.75

0.80

0.80

0.90

1.00

1.00

1.15

1.35

Allocated to Plant

A

A

A (B)

B (A)

B

A (B)

B (A)

A

A (B)

B (A)

B

B

 

We consider this cost-effective MAC in finding efficient level of emissions.