AEM_451_PS_3_Solutions

# AEM_451_PS_3_Solutions - AEM 451/ECON 409 Solutions to...

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AEM 451/ECON 409 Solutions to Problem Set #3 1) a) We need to check all critical points (MD=MB1), as well as the endpoints to find the optimal level of pollution. (If MD crossed MB1 exactly once, from below, the critical point would be a global maximum, but that isn’t assured in this problem.) Marginal n N et benefits are the distance between the marginal benefits and marginal damages curves (negative if MB is below MD) , so total net benefits at any quantity of pollution are the accumulated area between the two curves up to that quantity (and that area , or parts of it, can be negative , representing negative net benefits ) . Point Type Net Benefits 0 Endpoint 0 2 Critical Point -A-B-E 3 Critical Point H-A-B-E 6 Endpoint H-A-B-E-K-N-M We can immediately discard points 2 and 6, as point 3 is obviously preferred to them. So, we have to compare points 0 and 3. If this graph is to scale, it would appear that H is smaller than A+B+E, so point 0 is preferred to point 3, because H-A-B-E<0. b) Again, we need to check all critical points and endpoints. Point Type Net Benefits 0 Endpoint 0 1 Critical Point -A 5 Critical Point D+G+H+J-A 6 Endpoint D+G+H+J-A-M Again, we can discard the final endpoint and the first critical point, because point 5 has greater net benefits. We need to compare point 0 and point 5, and in this case, it appears as though D+G+H+J>A, so point 5 would offer greater net benefits than point 0.

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