Principles of Economics
7th Edition
ISBN: 9781305156043
Author: N. Gregory Mankiw
Publisher: Cengage Learning US
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Chapter 3, Problem 6PA
Subpart (a):
To determine
Calculate opportunity cost .
Subpart (b):
To determine
Calculate opportunity cost.
Subpart (c):
To determine
Specialization in the production.
Subpart (d):
To determine
Trade and the price of the product.
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"Whether the regulator sells or gives away tradeable emission
permits free of charge, the quantities of emissions produced by
firms are the same."
Assume that there are n identical profit-maximising firms where
profit for each firm is given by π(e) with л'(e) > 0; π"(e) <
0 and e denotes emissions. Individual emissions summed over
all firms gives E which generates environmental damages
D(E). Show that the regulator achieves the optimal level of total
pollution through a tradeable emission permit scheme, where
the permits are distributed according to the following cases:
Case (i) the firm purchases all permits;
Case (ii) the firm receives all permits free; and
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Case (iii) the firm purchases a portion of its permits and receives
the remainder free of charge.
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