# PS2 - EEP101/ECON125 Spring 99 Prof D. Zilberman TA's:...

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EEP101/ECON125 Spring 99 Prof D. Zilberman TA's: Malick/Marceau 2/23/99 1 PROBLEM SET 2 Due Tuesday, March 9, 1999, in class (Late assignments will not be graded) 1. Assume there are two polluting firms in the economy with marginal benefit curves given by: MB 1 = 100 – 2q 1 for firm 1, and MB 2 = 100 – (2/3)q 2 for firm 2, where q i, i =1,2 , 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 three 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 = 40 + 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 and q* 2 . Show these levels on the same graph. e) Given the optimal tax, what is the total cost of reducing emissions up to q* 1 and q* 2 ? f) Suppose that instead of a tax, the government decides to use a uniform standard equal to Q*/2. What is the level of emissions produced by each firm? Show it on the graph.

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PS2 - EEP101/ECON125 Spring 99 Prof D. Zilberman TA's:...

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