EEP101/ECON125 Spring 00 Prof.: D. Zilberman GSIs: Malick/McGregor/St-Pierre PROBLEM SET 2 Due Thursday, March 9, 2000 in class (Late assignments will not be graded) 1. Assume there are three polluting firms in the economy with marginal benefit curves given by: MB 1 = 75 – (5/4)q 1 for firm 1, MB 2 = 75 – q 2 for firm 2, and MB 3 = 75 – (3/4)q 3 where q i (i=1,2,3) is the amount of emissions produced by each firm. a) Find the aggregate marginal benefit curve. (Hint: Find the horizontal sum of the individual MB curves). Draw each of the four curves in a single graph. b) Which firm is more efficient in reducing pollution? Explain. c) If the marginal social cost curve is given by MSC = 30 + Q, what is the optimal level of emissions (Q*) to be produced? Show both the MSC curve and Q* on the same graph. d) What is the optimal tax to be levied to achieve Q*? Given this tax, find the amount of emissions produced by each firm, q* 1 , q* 2 , and q* 3 . Show these levels on the same graph. e)
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