PS_4_2008_ProblemSet

PS_4_2008_ProblemSet - Environmental Economics AEM 451 ECON...

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Environmental Economics AEM 451 / ECON 409 Assignment #4 Distributed April 12, 2008; due on Thursday, April 17, 2008 at the beginning of class. Recall that you may work with others, but that your write-up must be your own. 1. Fee versus marketable permit system when control cost is uncertain Suppose the total cost of controlling the pollution in Bangkok is given by TC = (3+r)q 2 , where q is the amount of emissions controlled. Uncontrolled, there would be 2 units of emissions. Thus q = 2 – e, where e is emissions. The variable r is unknown to the pollution control board. All they know is that it could take the value of either r = 0 or r = 4, and with equal likelihood. Marginal damage from emissions is given by MD(e) = 4e. a) Write the total cost of pollution control in terms of e. Graph this total cost as a function of e. b) Graph the marginal damages from emissions and the expected value (i.e. average over the two possible values of r) of the marginal savings from emissions. Be as accurate as you can. c)

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PS_4_2008_ProblemSet - Environmental Economics AEM 451 ECON...

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