Suppose there are two types of firms in an industry all the

Question

Environmental Economics Homework 4

1. a. In the introduction the authors state,

The design and implementation of the landmark SO₂ cap-and-trade system have led to four striking ironies that are the focus of this essay. First, subsequent research indicates that in enacting an ambitious - and successful - policy to reduce SO₂ emissions in order to curb acid rain, the government essentially did the right thing for the wrong reason.

According to the authors, why was the cap-and-trade system the right thing for the wrong reason?

b. There is some evidence that the SO₂ allowance program favored scrubbers over low sulfur coal as a way to abate emissions. According to the article, why this favoritism?

c. How did rail deregulation affect the cost of the program?

Q2. Suppose a government agency is considering either a green tax or tradable pollution permits to control a uniformly mixed pollutant. The government does not know the MAC curves of individual firms, but does know the aggregate MAC curve and does know the MPD curve. Can you draw the following conclusions about the effect of the respective pollution control policies? (circle "Yes" or "No" for each statement)

a. Government can generate the efficient amount of emissions reduction using either permits or taxes.

Yes/No

b. Both permits and taxes will generate the result that firms will have the same marginal abatement cost.

Yes/No

c. Both permits and taxes will generate the desired level of total emissions at least cost.

Yes/No

3. The following questions pertain to the graph below.

The graph presents the MAC curves of two types of firms in a polluting industry, the industry-level (aggregate) MAC curve, as well as the MPD curve.

Suppose government chooses to reduce emissions from the original position of E' to E" by allocating tradable pollution permits to the two types of firms. Firms of Type 1 receive E₁ permits and Firms of Type 2 receives E₂ permits, with E₁+E₂=E".

a. Is the chosen level of total emissions E" the efficient level?

b. On the graph show the price of a permit with the letter "P".

c. Will Type 1 firms buy permits, sell permits, or do neither?

Q4. Suppose there are two types of firms in an industry. All the firms within each type are the same. The aggregate MAC curve for each type is given below:

MAC₁ = 600 - 3E₁

MAC₂ = 600 - 2E₂

a. What is the aggregate MAC curve for the industry?

b. If the MPD curve for the pollutant emitted by the industry is MPD=2.8E, what amount of tradeable permits will generate the efficient amount of emissions?

c. If the MPD curve is the same as in (b), what tax on emissions would generate the efficient amount of emissions?

d. Now suppose that permits are evenly distributed among the firms in the industry. Which of the firm types will be net buyers of permits?

e. What is the total cost of the permit system to firms in the industry?

f. What is the social net benefit of the permit system?