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,
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.