Econ 450 Autumn 2015 HW 2 Solutions.pdf - Econ 450 Summer 2015 HW 2 1 True or false A tax on pollution is completely equivalent to a subsidy for

# Econ 450 Autumn 2015 HW 2 Solutions.pdf - Econ 450 Summer...

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Econ 450 Summer 2015 HW 2 1. True or false: A tax on pollution is completely equivalent to a subsidy for pollution reduction. 5 points False. IT may have the same efficiency properties, but a tax collects public revenue, while a subsidy costs public revenue. 2. Suppose a public project that would save 100,000 people 10 minutes a day, starting in 1 year, and continuing forever , is being considered by the government. This project would have an upfront cost of 500,000 dollars. The wage of all of these 100,000 people is 12 dollars an hour, and the discount rate is 25 percent. (a) What are the costs and benefits of this project? 5 points10 minutes = 16of an hours; 12 / hour = 2 dollars. 100,000 peopleat 2 dolars = 200,000 per day in saved time.This is 100,000 *365 = 73 million per year. The discounted present value of thisstream is73.25= 292million per year. These are the benfits. Thecosts are 500 thousand, or .5 million.(b) What is the internal rate of return of this project? 5 points Wesolve-.5 +73ρ= 0ρ= 146The interest rate could beveryhigh and this project will still beworth doing. 3. Consider two polluting firms, with marginal costs of pollution reduc-tion: MCA= 10RMCB= 4RThe marginal damage of a unit of pollution is 200; the firms are cur-rent emitting 100 units of pollution.(a) Protester demand these firms ceased all pollution immediately,since they harming the environment. In what sense are the protesterscorrect? In what sense are they wrong? 5 pointsThere firms are indeed damaging the environment, but the opti-mal amount of pollution is not 01This study resource wasshared via CourseHero.com

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(b) What is the optimal amount of reduction? 10 pointsWe solve200 = 10RAR*A= 20200 = 4RAR*A= 50The optimal amount is 70.(c) What is the optimal emissions fee to achieve this outcome?5pointsWe set the fee equal to the marginal damage,τ= 200.(d) What is the optimal cap for a cap and trade system? 5 pointsWe set the cap equal to the amount of pollution after the optimalreduction: 100*2-70 = 130 4. The city of Smartsville, WA, is deciding how much to spend on ed- ucation. There are three types of household, (A,B,C) with different

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