economics-ch10,11,18-21

economics-ch10,11,18-21 - Answers to selected"Problems and...

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Answers to selected Problems and Applications Questions in Mankiw Chapter 10 2. a. The statement, "The benefits of Pigovian taxes as a way to reduce pollution have to be weighed against the deadweight losses that these taxes cause," is false. In fact, Pigovian taxes reduce the inefficiency of pollution by reducing the quantity of the good being produced that has pollution as a by-product. So, Pigovian taxes reduce deadweight loss, they do not increase it. b. The statement, "When deciding whether to levy a Pigouvian tax on consumers or producers, the government should be careful to levy the tax on the side of the market generating the externality" is inaccurate. It does not matter on whom the tax is imposed the incidence of the tax will be identical. So whether the externality is caused by the seller or the buyer of a good, a tax on either producers or consumers will lead to the same reduction of quantity and change in the prices producers receive or consumers pay.
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9. a. If the government knew the cost of reduction at each firm, it would have Acme eliminate all its pollution (at a cost of $10 per ton times 100 tons = $1,000) and have Creative eliminate half of its pollution (at a cost of $100 per ton times 50 tons = $5,000). This minimizes the total cost ($6,000) of reducing the remaining pollution to 50 tons. b. If each firm had to reduce pollution to 25 tons (so each had to reduce pollution by 75 tons), the cost to Acme would be 75 x $10 = $750 and the cost to Creative would be 75 x $100 = $7,500. The total cost would be $8,250. c. In part a, it costs $6,000 to reduce total pollution to 50 tons, but in part b it costs $8,250. So it is definitely less costly to have Acme reduce all of its pollution and have Creative cut its pollution in half. Even without knowing the costs of pollution reduction, the government could achieve the same result by auctioning off pollution permits that would allow only 50 tons of pollution. This would ensure that Acme reduced its pollution to zero (since Creative would outbid it for the permits) and Creative would then reduce its pollution to 50 tons. 11. a. An improvement in the technology for controlling pollution would reduce the demand for pollution rights, shifting the demand curve to the left. Figure 4 illustrates what would happen if there were a Pigovian tax, while Figure 5 shows the impact if there were a fixed supply of pollution permits. In both figures, the curve labeled D1 is the original demand for pollution rights and the curve labeled D2 is the new demand for pollution rights after the improvement in technology.
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Figure 4 b. With a Pigovian tax, the price of pollution remains unchanged and the quantity of pollution declines, as Figure 4 shows. With pollution permits, the price of pollution declines and the quantity of pollution is unchanged, as Figure 5 illustrates.
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economics-ch10,11,18-21 - Answers to selected"Problems and...

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