1. Town A suffers from pollution by two firms which we will call Firm 1 and Firm 2. The two firmsemit 100 units of pollution together, 60 units emitted by Firm 1 and 40 units emitted by Firm 2.Residents of Town A would like the local government to regulate these two firms so that pollutionis reduced by 45 units. Marginal pollution control costs for the two firms are given in the tablebelow.Firm EmissionsReduction5101520Firm 1Marginal Cost ($)2530354045505101520Firm 2Marginal Cost ($)1020304025303540455055556060If the local government decides to adopt a cap-and-trade policy to achieve the desired level ofpollution and plans to auction off the allowances to the highest bidder:50607080a) How many allowances will the control authority auction off? Why?b) Assuming no market power, how many of the allowances would each firm be expected tobuy? Why?c) Assuming that demand equals supply, what price would be paid for those allowances? Why?If the control authority decided to use an emissions tax rather than cap-and-trade, what taxrate would achieve the 45 unit reduction cost effectively.d)

There are two firms : Firm 1 & Firm 2 , Firm 1 emission = 60 Firm 2 emission = 40 Government…

1. Town A suffers from pollution by two firms which we will call Firm 1 and Firm 2. The two emit 100 units of pollution together, 60 units emitted by Firm 1 and 40 units emitted by Fir Residents of Town A would like the local government to regulate these two firms so that po is reduced by 45 units. Marginal pollution control costs for the two firms are given in the ta below. Firm Emissions Reduction 5 10 15 20 Firm 1 Marginal Cost ($) 5 10 15 20 Firm 2 Marginal Cost ($) 10 20 30 40

1. Town A suffers from pollution by two firms which we will call Firm 1 and Firm 2. The two emit 100 units of pollution together, 60 units emitted by Firm 1 and 40 units emitted by Fir Residents of Town A would like the local government to regulate these two firms so that po is reduced by 45 units. Marginal pollution control costs for the two firms are given in the ta below. Firm Emissions Reduction 5 10 15 20 Firm 1 Marginal Cost ($) 5 10 15 20 Firm 2 Marginal Cost ($) 10 20 30 40

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section: Chapter Questions

Problem 10PA

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In the Land of Purity, there is only one form of pollution, called gunk. Table 12.14 shows possible combinations of economic output and reduction of gunk, depending on what kinds of environmental regulations you choose. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of gunk, and with the quantity of economic output on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between K and L, can you say which one is better and why? In the choice between K. and N, can you say which one is better, and why? If you had to guess, which choice would you think is move likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice L or M? Why?
How can high-income countries benefit from covering much of the cost of reducing pollution created by low-income countries?
Table 12.12, shows the supply and demand conditions for a firm that will play trumpets on the streets when requested. QS1 is the quantity supplied without social costs. QS2 is the quantity supplied with social costs. What is the negative externality in this situation? Identify the equilibrium price and quantity when we account only for private costs, and then when we account for social costs. How does accounting for the externality affect the equilibrium price and quantity?
The rows in Table 12.7 show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.
Refer to Table 12.2. The externality created by the refrigerator production was 100. However, once we accounted for both the private and additional external costs, the market price increased by only 50. If the external costs were 100 why did the price only increase by 50 when we accounted for all costs?
A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwoods forest and grow com, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between T and R, decide which one is better. Why? In the choice between T and S, can you say which one is better, and why? If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?
Table 12.5 provides the supply and demand conditions for a manufacturing film. The third column represents a supply curve without accounting for the social cost of pollution. The fourth column represents the supply curve when the film is required to account for the social cost of pollution. Identify the equilibrium before the social cost of production is included and after the social cost of production is included.
Classify the following pollution-control policies as command-and-control or market incentive based. A state emissions tax on the quantity of carbon emitted by each firm. The federal government requires domestic auto companies to improve car emissions by 2020. The EPA sets national standards for water quality. A city sells permits to films that allow them to emit a specified quantity of pollution. The federal government pays fishermen to preserve salmon.
Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Fe and Qe. On the graph, shade in the deadweight loss at the market output.
A city currently emits 15 million gallons (MG) of raw sewage into a lake that is beside the city. Table 12.13 shows the total costs (TC) in thousands of dollars of cleaning up the sewage to different levels, together with the total benefits (TB) of doing so. Benefits include environmental, recreational, health, and industrial benefits. Using the information in Table 12.13 calculate the marginal costs and marginal benefits of reducing sewage emissions for this City. What is the optimal level of sewage for this city? How can you tell?