PROBSET5 - Problem Set 5 ARE 201 December 2 2003 (This...

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Problem Set 5 ARE 201 December 2 2003 (This problem is inspired by Trade, Politics and the Environment: Smokestack versus Tailpipe by Carol McAusland. The point of the problem is to see how equilibrium taxes in a political economy model depend on whether the economy is open or closed, and on whether the environmental problem is associated with production or consumption of a good.) Consider a partial equilibrium model in which γ dollars worth of damages are created by each unit of (either) production or consumption (but not both) of the good. The social planner gives more weight to producer interests than to the interests of other agents (consumers, taxpayers and people who are a f ected by environmental damages.) Let D ( p ) and S ( p ) be the demand and supply functions (marginal utility of consumption and marginal cost of production, respectively). If damages are caused by production, and the social planner uses a production tax t , the value of the planner’s objective is V ( t ; α )= α Z P p ¯ S ( p ) dp + Z ¯ p P + t D ( p ) dp +( t γ ) S ( P ) , (1) where P is the equilibrium price received by producers α> 1 is a parameter that measures the planner’s preference for producer surplus. (If the tax is
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This note was uploaded on 08/01/2008 for the course ARE 201 taught by Professor Karp during the Fall '07 term at University of California, Berkeley.

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PROBSET5 - Problem Set 5 ARE 201 December 2 2003 (This...

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