In this problem, we want to think about the difficulties that governments face in agreeing to significantly reduce CO2 emissions in order to control climate change. In the context of climate change, what phenomenon does China’s utility function capture? What does this exercise tell us about the limitations of the first welfare theorem? What do you think is an important aspect of trade in reality which is not captured by this model? We first want to understand why the issue of climate change requires government inter-vention and cannot be addressed by market mechanisms.Consider two countries, the US (U) and China (C) who enjoy two goods, smartphonesî, and rice îr. Their preferences are represented by the following utility functions:UU =uc=V S r√xcx² – 2x4Assume that smartphones are produced using only labour according to the productionfunction ys=√Ls. China is endowed with LC 10 units of labour and ef = 10 unitsof rice (which doesn't need to be manufactured). The US is endowed with no units oflabour or rice but owns the smartphone producer and is entitled to 100% of its profits.=

China's utility function captures the phenomenon that reducing CO2 emissions can result in a…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In this problem, we want to think about the difficulties that governments face in agreeing to significantly reduce CO2 emissions in order to control climate change.

In the context of climate change, what phenomenon does China’s utility function capture? What does this exercise tell us about the limitations of the first welfare theorem? What do you think is an important aspect of trade in reality which is not captured by this model?

We first want to understand why the issue of climate change requires government inter-
vention and cannot be addressed by market mechanisms.
Consider two countries, the US (U) and China (C) who enjoy two goods, smartphones
î, and rice îr. Their preferences are represented by the following utility functions:
UU =
uc
=
V S r
√xcx² – 2x4
Assume that smartphones are produced using only labour according to the production
function ys=
√Ls. China is endowed with LC 10 units of labour and ef = 10 units
of rice (which doesn't need to be manufactured). The US is endowed with no units of
labour or rice but owns the smartphone producer and is entitled to 100% of its profits.
=

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