PS_3_2008_ProblemSet - Environmental Economics AEM 451 /...

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Environmental Economics AEM 451 / ECON 409 Assignment #3 Distributed Feb. 28, 2008; due by 2:55 p.m. on Tuesday, March 4, 2008 at the beginning of class. Recall that you may work with others, but that your write-up must be your own. 1. Marginal benefits and marginal damages intersect more than once In scenic places such as the Grand Canyon, visibility is an important component of the visitation experience. As a result, the 1977 CAAA created Class 1 National Ambient Air Quality Regions in order to more stringently regulate for visibility as well as health effects. Suppose that with initial levels of ground level ozone and particulate matter pollution, the damages are quite high (reducing visibility from 100 miles to say 10) but that the marginal damages associated with further increases in particulate matter on visibility reduction decline over a broad range. Ultimately, however, health effects set in and the marginal damages again begin to rise as depicted below. Let denote the amount of particulate pollution. MD MB 1 MB 2 A B C D E F G H I J K $ 1 2 3 4 5 D 0 6 L N M a. What is the optimum level of pollution ( =0,1,2,3,4,5 or 6) if the marginal benefits of polluting are represented by MB 1 ? Defend your answer using the labeled areas. b. Suppose instead it were determined that an area near the Grand Canyon was the only place that a certain mineral could be mined, and thus the marginal benefits curve shifted to MB 2 . What is the optimal level of pollution? Defend your answer using the labeled areas.
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2. Polluting industry: perfect competition and monopoly Consider an industry that produces a good. The production of this good also produces a negative externality, such as pollution. We will use the following symbols:
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PS_3_2008_ProblemSet - Environmental Economics AEM 451 /...

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