Reference no: EM133495421

Permits

1. Suppose the United States Acid Rain Program (ARP), which was established under the 1990 amendments to the Clean Air Act, issued 25% more sulfur dioxide (SO₂) credits (i.e. permits) unexpectedly. If the price of SO₂ permits in the U.S. suddenly dropped by 8%, what is the price elasticity of demand for SO₂ permits?

2. Suppose part (1a) was referencing a total credit increase from 40 to 50 credits, and a SO₂ credit price decrease from $200 to $184 per credit. What tax on SO₂ would the United States need to set if they wanted to achieve the same level of SO₂ emissions reductions as those under the new equilibrium for the Acid Rain Program?

3. Provide a brief explanation for why you obtained your answer in (1b).

2. Why is the permit trading program in (1a) preferable over command-and-control policies (to economists) if both policies attempt to regulate the total amount of SO₂ emissions? Assume command-and-control policies set allowable SO₂ emissions for each firm to be equal, and the total number of SO₂ emissions are the same for both policies. Explain.