Reference no: EM133322250

Case: A policy-maker wants to regulate an industry with 20 firms. Each firm's total benefit from emissions is given by T Bi = 200ei - 5e2i . She wants to ensure that each firm will emit 10 units of emissions. Monitoring each firm separately would be prohibitively costly, so she considers several regulation options.

a) Absent regulation, how many emissions will each firm produce?

b) If she could monitor and apply a Pigovian tax to each emission, what tax rate would ensure each firm only emitted 10 units of pollution?

c) She decides to randomly choose 2 firms to monitor, and fine them per unit if their emissions exceed the allotted 10 units. First, she sets a fine equal to the optimal Pigovian tax rate found in part a). How much does each firm emit?

d) Realizing her mistake, she recalculates what level of fine, applied per unit for emissions above 10 units, would ensure that firms only emit 10 units of pollution. What is the minimum fine that would achieve this goal? (Note: Maintain the assumption that she monitors 2 randomly chosen firms).

e) She develops a new technology that cuts her monitoring price in half, so she is now able to monitor 4 randomly chosen firms. However, the technology can only determine whether or not a firm exceeds 10 units of emissions. Therefore she decides to apply a flat fine which applies if she catches a firm emitting more than 10 units of emissions, regardless of how much more. What is the minimum fine that ensures firms only emit 10 units of emissions?

f) Another policy-maker passes a law that caps the (lump-sum) fine for violating the emissions rules at $1000. How many firms need to be monitored in order to ensure ensures each firm only emits 10 units of emissions?