Assignment_3_AnswerKey

Assignment_3_AnswerKey - Assignment #3 Solution Key 1....

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Assignment #3 Solution Key 1. Unregulated emissions level e 1 = 625 - 1 2 MAC e 2 = 833 1 3 - 1 3 MAC E = 1458 1 3 - 5 6 MAC => MAC = 1750 - 6 5 E Therefore at MAC = 0 => E = 1458 1 3 Show firms have an incentive to trade: at e 1 = e 2 = 450 MAC 1 (450) = 1150 MAC 2 (450) = 350 Since MAC1 ≠ MAC2 the firms have an incentive to trade since firm 2 can save money and firm 1 can make money by trading to one another. This can also be seen graphically: Optimal allocation of permits MAC 1 = MAC 2 e 1 + e 2 = 900 1250 2e 1 = 2500 3e 2 1250 2(900 e 2 ) = 2500 3e 2 5e 2 = 3050 e 2 = 610 e 1 = 290 MAC 2 = 1150 MAC 1 = 350 MAC 1 MAC 2 E = 450
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To confirm: MAC 1 (290) = 670 MAC 2 (610) = 670 Therefore MAC 1 = MAC 2 and the firms no longer have an incentive to trade. 2. Start by graphing the problem: Since the tax is equal to $1,000 per unit this mean MAC = 1000. Plug this into the MAC function to find the amount of emissions. 1000 = 2000 e e = 1000 => Therefore 1000 units of emissions is how the industry will respond to the tax and permits. This implies that the 500 permits will be sold for $1,000 or less each and an additional 500 units of emissions will be created by firms for a cost of $1,000 per unit. Therefore the total amount paid in taxes will be 500 x $1,000 = $500,000 and the amount paid in abatement effort will be the area of the triangle to the right of e = 1000 or 1 2 (2000 1000) * (1000) = $500,000 Tax Permit Amount 2000 1500 1000 500 1000 2000
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3. Blue
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This note was uploaded on 08/16/2008 for the course ECON 2100 taught by Professor Ferguson,craig during the Spring '08 term at University of Guelph.

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Assignment_3_AnswerKey - Assignment #3 Solution Key 1....

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