Answered: Climate change is the defining…

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

Climate change is the defining challenge of the 21st century. Fighting climate change requires worldwide effort. For simplicity, let us assume that there are two countries in the world, countries 1 and 2. The preferences of the two countries are identical and characterized by

U(xj,C)= 3lnxj+lnC

for j is element of (1,2) , where ix, s the private consumption of country j is element of (1,2), and C is the sum of global contributions for climate protection. Countries 1 and 2 contribute c1 and c2 , respectively, and hence C= c1+c2. Assume that px=pc=1 and that each country has a €800 budget for both goods.

What are the two main characteristics of a public good?
Determine the level of contribution from each country, and in the decentralized market equilibrium.
Determine the socially optimal contributions from each country.
Why does the socially optimal level of contributions in (c) differ from the level in (b)?

Definition Video Formula Definition Phenomenon in which market supply and demand balance each other. Market equilibrium is the economic state in which the market demand curve intersects the market supply curve, giving us the equilibrium price and equilibrium quantity for which a commodity can be sold and purchased in an economy. When market equilibrium is achieved, it suggests that all resources have been allocated efficiently and that there is just a distribution of income and resources in the economy. Video Formula

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