A firm has a marginal emissions benefit of 100-0.5*E in each of 2 years, where E measures emissions in tons. The marginal cost of emissions to society is 75/ton. The discount rate is 10% and the marginal cost of emissions also grows at 10% per year. The government decides to give the firm permits to emit 50 tons of emissions per year, but allows the firm to "bank" or "borrow" permits across the two years so that this effectively acts as a 100 ton cap on emissions over 2 years. How much will the firm emit in each year? If all firms are identical to the one you analyze here, is the government issuing too many or too few emission permits relative to the efficient level? How do you know?

A firm has a marginal emissions benefit of 100-0.5*E in each of 2 years, where E measures emissions in tons. The marginal cost of emissions to society is 75/ton. The discount rate is 10% and the marginal cost of emissions also grows at 10% per year. The government decides to give the firm permits to emit 50 tons of emissions per year, but allows the firm to "bank" or "borrow" permits across the two years so that this effectively acts as a 100 ton cap on emissions over 2 years. How much will the firm emit in each year? If all firms are identical to the one you analyze here, is the government issuing too many or too few emission permits relative to the efficient level? How do you know?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A firm has a marginal emissions benefit of 100-0.5*E in each of 2 years,
where E measures emissions in tons. The marginal cost of emissions to
society is 75/ton. The discount rate is 10% and the marginal cost of
emissions also grows at 10% per year.
The government decides to give the firm permits to emit 50 tons of
emissions per year, but allows the firm to "bank" or "borrow" permits across
the two years so that this effectively acts as a 100 ton cap on emissions over
2 years. How much will the firm emit in each year? If all firms are identical to
the one you analyze here, is the government issuing too many or too few
emission permits relative to the efficient level? How do you know?

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