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Problem_Set_2_Econ_131

Problem_Set_2_Econ_131 - Economics 131 Fall Quarter 2009...

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Problem Set #2 (From lecture of October 8, 2009) A. Consider a pollution control policy that offers a polluter a subsidy of s per unit of pollution reduction from its pre-policy level, Q_m. Question 1: How much pollution will the firm produce if given the subsidy s for every unit less than Q_m that it does not produce? Explain. Question 2: What is the optimal or efficient subsidy level s*? How does s* compare to the optimal tax t*? Question 3: Since the optimal subsidy s* and the optimal tax t* both lead to the same quantity of pollution, Q*, total social surplus is maximized by either policy. Show in a graph how the total surplus is shared between the producer (the polluter) and the public (the pollutees). Assume the public receives any revenues raised by the optimal tax t*, but pay (through other taxes) for any subsidies given to the producer under the optimal subsidy s*. Question 4: Given your answer to Question 3 which policy (tax or subsidy) would be
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