436 Problem Set 4 SU19.pdf - Economics 436 Summer 2019...

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Economics 436 Summer 2019 Fourth Problem Set Due July 10 th I. Suppose two polluters are emitting a disaggregate pollutant and their MB and MD curves are not known by the government. A. Explain why tradable permits would minimize the total cost of reducing emissions but would not minimize the total cost of reducing ambient pollution. B. Explain, in words only, why tradable permits will result in more environmental damage than non-tradable permits if marginal damages are positively correlated with marginal benefits. II. Suppose that emissions of a greenhouse gas are proportional to the output of a perfectly competitive industry and it has been decided to reduce pollution by one-half using tradable permits. A. Imposition of the regulation will increase the price paid by consumers and decrease the net price received by suppliers. 1. Explain why. 2. If the difference between the price paid by consumers and the net price received by suppliers is $2.00, the elasticity of supply is 1.5, and the
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