Marginal Abatement Cost
What is Marginal Abatement Cost?
Marginal abatement cost is the cost of reducing pollution by one additional unit, and it typically rises as more pollution is cut.
Cheap reductions (efficiency tweaks) are made first, so the marginal abatement cost curve slopes upward as a firm pushes to eliminate ever-harder units of emissions. The efficient level of pollution control is where marginal abatement cost equals the marginal benefit (or marginal damage avoided) of cleaning up. The concept underpins why a carbon price or cap-and-trade system minimizes total cleanup cost: firms abate up to the point where their marginal abatement cost equals the permit price.
Marginal Abatement Cost: a worked example
Riverside Mill can cut emissions in 100-tonne blocks. The first block costs $10 a tonne through better insulation, the second $25 a tonne with a new burner, the third $60 a tonne because the old furnace must be replaced. Regulators value each tonne avoided at $30 of damage. Block one earns ($30 - $10) x 100 = $2,000 of net gain and block two earns ($30 - $25) x 100 = $500. Block three would cost ($60 - $30) x 100 = $3,000 more than the harm it prevents. The efficient cut is 200 tonnes, not zero and not everything.
The mistake students make with marginal abatement cost
The belief to drop is that the right amount of pollution is zero. Efficiency stops where marginal abatement cost meets marginal damage avoided, and the last tonnes are the dear ones, so buying block three destroys $3,000 of value to prevent $3,000 of harm at a cost of $6,000. Zero appeals because pollution reads as a wrong to be abolished rather than a quantity to be priced. A related slip is quoting an average cost per tonne for a whole program as the marginal cost, which flattens a curve that is steep at the end.
Marginal Abatement Cost questions
Why does the marginal abatement cost curve slope upward?
The marginal abatement cost curve slopes upward because firms take the cheapest reductions first. Sealing leaks, tuning equipment and switching to a less wasteful input cost little per tonne, so they go first. Once those are used up, the remaining tonnes require replacing capital, redesigning a process or shutting a production line, each costing more per tonne than the last. The curve is those options ranked from cheapest to dearest.
How does a carbon price use marginal abatement costs?
A carbon price makes every emitter abate up to the point where its own marginal abatement cost equals the price, then pay for whatever it emits beyond that. Because all firms face the same price, all end up at the same marginal cost, which is the condition for reaching a given total reduction at the lowest possible cost. The regulator never has to know any individual firm's abatement costs, which is the point.
What is the difference between marginal abatement cost and marginal damage?
Marginal abatement cost is what it costs the polluter to remove one more tonne, and it rises as cleanup goes deeper. Marginal damage is the harm the next tonne emitted inflicts on everyone else, and it typically rises as pollution accumulates. The efficient level of pollution sits where the two curves cross, since a tonne is worth removing only while removing it costs less than the damage it would do.
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