Los Angeles County has the worst urban air quality across all major metropolitan areas in the United States. Assume the California Air Resources Board is considering whether to set a uniform emission standard or a regionally-based emission standard, where one standard is set for Los Angeles County and another for the rest of the state. MSB, MSC, and MCE of abatement for the two regions have been estimated as follows:

MSB (LA) = 500 – 0.75A

MSC (rest) = 150 – 0.25A

MSC (all) = 0.5A

MCE (all) = 0.01A

*Note: MSC (all) and MCE (all) apply to both regions.

a. Find the numerical value of the efficient level of abatement for each region. Graph the MSB (LA), MSB (rest), and MSC (all) functions on the same diagram showing this result.

b. Based on these results, are the differentiated (higher) standards for LA supported on efficiency grounds? Why?

c. A uniform abatement standard is also being considered across the State of California of 300 units. Does this policy lead to over-regulation or under-regulation for LA? Does this policy lead to over-regulation or under-regulation for the rest of the state?

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