3. Consider the market for paper. The process of producing paper creates pollution. Assume that the marginal damage function for pollution is given by: MDF = 3E where damages are measured in dollars and E is the level of emissions. Assume further that the function describing the marginal abatement cost of emissions is given by MAC 120-E where benefits are measured in dollars and E is the level of emissions. a. Graph the marginal damage function (MDF) and the marginal abatement cost function (MAC). b. What is the unregulated level of emissions Eu? What is the social welfare of this emissions level? c. Assume an existing emission quota limits emissions to E = 60. Show on the graph why this policy is inefficient. What is the deadweight loss caused by this policy? d. Solve for the efficient emission quota. Assuming perfect compliance with this quota, what are the total costs of pollution? And what are the total costs of abatement? e. If compliance with the quota becomes a problem, and the regulator is able to set a fine for noncompliance, what would be the optimal fine per unit of emission? f. Now, rather than a quota, the regulator is able to set a tax on emissions. At what level should the tax be set? How much revenue would the tax generate? Indicate the tax revenue on your graph.
3. Consider the market for paper. The process of producing paper creates pollution. Assume that the marginal damage function for pollution is given by: MDF = 3E where damages are measured in dollars and E is the level of emissions. Assume further that the function describing the marginal abatement cost of emissions is given by MAC 120-E where benefits are measured in dollars and E is the level of emissions. a. Graph the marginal damage function (MDF) and the marginal abatement cost function (MAC). b. What is the unregulated level of emissions Eu? What is the social welfare of this emissions level? c. Assume an existing emission quota limits emissions to E = 60. Show on the graph why this policy is inefficient. What is the deadweight loss caused by this policy? d. Solve for the efficient emission quota. Assuming perfect compliance with this quota, what are the total costs of pollution? And what are the total costs of abatement? e. If compliance with the quota becomes a problem, and the regulator is able to set a fine for noncompliance, what would be the optimal fine per unit of emission? f. Now, rather than a quota, the regulator is able to set a tax on emissions. At what level should the tax be set? How much revenue would the tax generate? Indicate the tax revenue on your graph.
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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Transcribed Image Text:3. Consider the market for paper. The process of producing paper creates pollution. Assume that
the marginal damage function for pollution is given by:
MDF = 3E
where damages are measured in dollars and E is the level of emissions. Assume further that the
function describing the marginal abatement cost of emissions is given by
MAC 120-E
where benefits are measured in dollars and E is the level of emissions.
a. Graph the marginal damage function (MDF) and the marginal abatement cost function
(MAC).
b. What is the unregulated level of emissions Eu? What is the social welfare of this emissions
level?
c. Assume an existing emission quota limits emissions to E = 60. Show on the graph why this
policy is inefficient. What is the deadweight loss caused by this policy?
d. Solve for the efficient emission quota. Assuming perfect compliance with this quota, what
are the total costs of pollution? And what are the total costs of abatement?
e.
If compliance with the quota becomes a problem, and the regulator is able to set a fine for
noncompliance, what would be the optimal fine per unit of emission?
f. Now, rather than a quota, the regulator is able to set a tax on emissions. At what level
should the tax be set? How much revenue would the tax generate? Indicate the tax revenue
on your graph.
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