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Unformatted text preview: EEP 101/ECON 125 Prof. Zilberman GSIs: Alix, McKim, Schoengold Problem Set # 2 Due Tuesday, March 5 ( Assignments turned in after the beginning of lecture will not be graded ) Numerical problems 1. Assume that manufacturing of PVC tubing, which produces large amounts of carcinogenic byproducts, is undertaken by two firms. The total benefits that the firms derive from releasing this cancer-causing stuff into the environment are given by: 2 1 4 1 1 1 75 X X B- = and 2 2 2 2 100 X X B- = . A combination of experts from the School of Public Health and the Department of Resource Economics have assessed the marginal damage function to be: X MEC 4 3 10 + = where 2 1 X X X + = . Using this information, please answer the following questions both graphically and using mathematics . a) Find the aggregate demand function of firms for carcinogens and show it on your graph. b) Find the amount of carcinogens released by the two firms in the absence of regulation. Label these points Q 1 and Q 2 on your graph. c) What is the socially optimal level of pollution? d) Suppose now that the government decides to impose a system of pollution permits. They are not allowed to trade. The government is considering two different forms of permit allocation. In the first, each firm receives permission to release of the...
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- Spring '07