EBK BRIEF PRINCIPLES OF MACROECONOMICS
EBK BRIEF PRINCIPLES OF MACROECONOMICS
8th Edition
ISBN: 8220103600552
Author: Mankiw
Publisher: CENGAGE L
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Chapter 14.3, Problem 3QQ
To determine

The impact of smaller spending on savings, investment, interest rate, real exchange rate, and the trade balance of the economy.

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Suppose there are two firms 1 and 2, whose abatement costs are given by c₁ (e₁) and C2 (е2), where e denotes emissions and subscripts denote the firm. We assume that c{(e) 0 for i = 1,2 and for any level of emission e we have c₁'(e) # c₂' (e). Furthermore, assume the two firms make different contributions towards pollution concentration in a nearby river captured by the transfer coefficients ε₁ and 2 such that for any level of emission e we have C₂'(e) # The regulator does not know the resulting C₁'(e) Τι environmental damages. Using an analytical approach explain carefully how the regulator may limit the concentration of pollution using (i) a Pigouvian tax scheme and (ii) uniform emissions standards. Discuss the cost-effectiveness of both approaches to control pollution.
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