Suppose that a natural gas power plant emits carbon emissions (E) as a byproduct of electricity generation. Marginal damages are given by 4E. The power plant's marginal abatement costs are given by 20 – E. Furthermore, suppose that the regulator does not know the power plant's MAC, but estimates it to be 15 – E. - 1. What level of emissions will the natural gas power plant emit in the absence of regulation? Illustrate the unregulated equilibrium on a graph. 2. Suppose that the regulator decides to regulate the power plant using an emission tax. What level of pollution is emitted in this case? Illustrate the effects of the tax on emissions and welfare on a graph. 3. If the regulator was to instead employ an emissions standard, what level of pollution is emitted? Illustrate the effects of the standard on emissions and welfare on a graph. 4. Which policy would be preferred by society? Why? Explain your reasoning.

Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter14: Environmental Economics
Section: Chapter Questions
Problem 7SQ
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Suppose that a natural gas power plant emits carbon emissions (E) as a byproduct of
electricity generation. Marginal damages are given by 4E. The power plant's
marginal abatement costs are given by 20 – E. Furthermore, suppose that the
regulator does not know the power plant's MAC, but estimates it to be 15 – E.
-
1. What level of emissions will the natural gas power plant emit in the absence of
regulation? Illustrate the unregulated equilibrium on a graph.
2. Suppose that the regulator decides to regulate the power plant using an emission tax.
What level of pollution is emitted in this case? Illustrate the effects of the tax on
emissions and welfare on a graph.
3. If the regulator was to instead employ an emissions standard, what level of pollution is
emitted? Illustrate the effects of the standard on emissions and welfare on a graph.
4. Which policy would be preferred by society? Why? Explain your reasoning.
Transcribed Image Text:Suppose that a natural gas power plant emits carbon emissions (E) as a byproduct of electricity generation. Marginal damages are given by 4E. The power plant's marginal abatement costs are given by 20 – E. Furthermore, suppose that the regulator does not know the power plant's MAC, but estimates it to be 15 – E. - 1. What level of emissions will the natural gas power plant emit in the absence of regulation? Illustrate the unregulated equilibrium on a graph. 2. Suppose that the regulator decides to regulate the power plant using an emission tax. What level of pollution is emitted in this case? Illustrate the effects of the tax on emissions and welfare on a graph. 3. If the regulator was to instead employ an emissions standard, what level of pollution is emitted? Illustrate the effects of the standard on emissions and welfare on a graph. 4. Which policy would be preferred by society? Why? Explain your reasoning.
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