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 writeup 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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 Spring '08
 SHAWHAN,D.
 Microeconomics, Supply And Demand, emission fee, Environmental Economics AEM

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