United states acid rain program

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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.

Reference no: EM133495421

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