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

This preview shows pages 1–4. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
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
3. Blue

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 8

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

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online