The new mayor has pledged to reduce air pollution and the

Assignment Help Econometrics

Reference no: EM13379046

The new mayor has pledged to reduce air pollution, and the only source of air pollution in the city are two cement plants, plant A and plant B. 25 years ago, when plant A was constructed, the cement production technology produced a lot more pollution; it therefore has a pollution abatement cost of 5c3, where c is a unit of pollution. Plant B was constructed 2 months ago; it has a pollution abatement cost of 10c2. Assume that neither plant is initially engaging in pollution abatement. The per unit benefit to a unit of pollution abatement is constant at $1500. Unless told otherwise, assume the plants are owned by different firms.

A) marginal abatement cost for plant A is 15c^2 marginal abatement cost for plant B is 20c

B) at social optimal level

15c^2 + 20c = 1500

3c^2 + 4c = 300

we get c=9.35

plant A contribution =1312

plant B contribution= 188

c) The mayor considers engaging in direct quantity regulation (also called "command- and-control") and declares that each firm must engage in 42.5 units of pollution abate- ment. (i) Is this socially optimal? Why or why not? (ii) If the plants are controlled by the same firm, would it be socially optimal of the mayor to state that the firm must engage in 85 units of pollution abatement? Why or why not?

d) Instead the mayor considers providing a subsidy of 1500 per unit of pollution abatement. What is the per plant and total level of pollution abatement? Is this socially optimal?

e) The mayor also considers issuing pollution permits and establishing a market for these permits. Plant A is given an initial endowment of permits such that it must engage in 60 units of pollution abatement (reduction). Plant B is given an initial endowment of permits such that it must engage in 25 units of pollution abatement (reduction). Assume the market for pollution permits is perfectly competitive. (i) What is the market clearing price for pollution permits? What level of pollution abatement (reduction) does each firm engage in? Is this socially optimal? How does the level of abatement compare here with part d?

f) [BONUS] Dropping the perfect competition assumption, what problems are likely to arise in practice in the permit market? How are the amount of trade and the permit price likely to change? Discuss

g) You are the economist responsible for advising the mayor on environmental issues. Which of the above policies would you recommend? Why?

Reference no: EM13379046

Questions Cloud

The following transactions adjusting entries and closing : the following transactions adjusting entries and closing entries were completed by king furniture co. during a

Your client through youcpa-a 50-year-old owner of a : your client through youcpa-a 50-year-old owner of a firm-has requested that she become a sole proprietorship in the

A profit maximizing monopolist is earning a positive : a profit maximizing monopolist is earning a positive economic profit. the wage it pays its workers rises. how will the

There are some critics of american corporate power who say : there are some critics of american corporate power who say that corporations have too much power and although

The new mayor has pledged to reduce air pollution and the : the new mayor has pledged to reduce air pollution and the only source of air pollution in the city are two

You are meeting with accounting department personnel to : you are meeting with accounting department personnel to make sure they understand the importance of corporate social

Assuming that you are the controller for a publicly traded : assuming that you are the controller for a publicly traded company your cfo has asked you to prepare a presentation for

Your ceo read a recent report on the importance of the sox : your ceo read a recent report on the importance of the sox act but he acknowledged that he does not know much about it.

The economy is experiencing a contraction recessionary gap : the economy is experiencing a contraction recessionary gap of 400 billion. what government spending stimulus would you

User Account

All Pages