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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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This document was uploaded on 02/04/2011.
 Spring '09

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