ps2 - Department of Agricultural and Resource Economics...

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Department of Agricultural and Resource Economics EEP 101/ECON 125 University of California at Berkeley David Zilberman PROBLEM SET 2 1. A policymaker has a good estimate of the marginal social cost of using a chemical, which is MSC x =+ 2 when x is the level of chemical use. However, the marginal benefits are not known. The policymaker knows that estimation of benefits tends to either be too high or too low. If: The true MB (= Demand) is Px =- 20 5 . . There is a 50% chance of overestimation, so that estimated demand is 30 5 . A 50% chance of underestimation so that 10 5 . . (a) Compare outcomes under tax vs. direct control. Which policy is more desirable? (b) How will your answers change if: True demand is 20 3 High demand is 30 3 Low demand is 10 3 . ? (c) What are the implications of your findings? 2. An industry consists of 10 firms, and each has its own fixed input/output of pollution/output coefficients and output capacity (see Table 1).
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ps2 - Department of Agricultural and Resource Economics...

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