Suppose that each firm pollutes 100 units and is given70 pollution permits (i.e., each firm must reducepollution by 30 units if they do not trade their permits).If firms are allowed to trade their permits, then theequilibrium price of permits will beandpermits.andas a result of being able to trade theirOA. $10; firm A buys 20 permits from firm Bprofits fall by $200 for A and rise by $200 forBOB. $10; firm A buys 20 permits from firm Bprofits rise by $40 for A and rise by $40 for BOC. $12; firm A sells 10 permits to firm B; profitsrise by $40 for A and rise by $40 for BOD. $12, firm A buys 10 permits from firm Bprofits fall by $120 for A and rise by $120 forBE. None of the aboveMarginal Abatement Cost ($)1816-412-10-8-MCA010 2030 40 50 60 70 80Pollution Abatement90-6°C Mostly clearNextM40

Step 1: Understanding the Initial SetupEach firm pollutes 100 units but is given 70 pollution…

Answered: Suppose that each firm pollutes 100…

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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A country called Sherwood is very heavily covered with a forest of 50,000 trees. There are proposals to clear some of Sherwoods forest and grow com, but obtaining this additional economic output will have an environmental cost from reducing the number of trees. Table 12.11 shows possible combinations of economic output and environmental protection. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the number of trees, and the quantity of economic output, measured in corn, on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between T and R, decide which one is better. Why? In the choice between T and S, can you say which one is better, and why? If you had to guess, which choice would you think is more likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice Q or S? Why?
In the Land of Purity, there is only one form of pollution, called gunk. Table 12.14 shows possible combinations of economic output and reduction of gunk, depending on what kinds of environmental regulations you choose. Sketch a graph of a production possibility frontier with environmental quality on the horizontal axis, measured by the percentage reduction of gunk, and with the quantity of economic output on the vertical axis. Which choices display productive efficiency? How can you tell? Which choices show allocative efficiency? How can you tell? In the choice between K and L, can you say which one is better and why? In the choice between K. and N, can you say which one is better, and why? If you had to guess, which choice would you think is move likely to represent a command-and-control environmental policy and which choice is more likely to represent a market-oriented environmental policy, choice L or M? Why?
Refer to Table 12.2. The externality created by the refrigerator production was 100. However, once we accounted for both the private and additional external costs, the market price increased by only 50. If the external costs were 100 why did the price only increase by 50 when we accounted for all costs?
Give an example of a positive externality and an example of a negative externality.
Would environmentalists favor command-and-control policies as a way to reduce pollution? Why or why not?
From an economic perspective, is it sound policy to pursue a goal of zero pollution? Why or why not?
Is zero pollution an optimal goal? Way or why not?
Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the model to show the impact of the negative externality from second-hand smoking. (Hint: In this case it is the consumers, not the sellers, who are creating the negative externality.) Label the social optimal output and price as Fe and Qe. On the graph, shade in the deadweight loss at the market output.
The rows in Table 12.7 show three market-oriented tools for reducing pollution. The columns of the table show three complaints about command-and-control regulation. Fill in the table by stating briefly how each market-oriented tool addresses each of the three concerns.
Consider the case of global environmental problems that spill across international borders as a prisoners dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries, A and B. Each country can cheese whether to protect the environment, at a cost of 10, or not to protect it, at a cost of zero. If one country decides to protect the environment, there is a benefit of 16, but the benefit is divided equally between the two countries. If both countries decide to protect the environment, there is a benefit of 32, which is divided equally between the two centuries. In Table 12.10, fill in the costs, benefits, and total payoffs to the countries of the following decisions. Explain why, without some international agreement, they are likely to end up with neither country acting to protect the environment.
How can high-income countries benefit from covering much of the cost of reducing pollution created by low-income countries?
Do market demand curves reflect positive externalities? Why or why not?

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