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Unformatted text preview: Economics 101-300 Winter, 2006 Homework Problem Set # 7 Problems: 1) The diagram below shows the marginal cost of pollution abatement for two paper producing firms, First Paper and Imperial Paper. Right now each firm pollutes at 120 tons per year. The government issues each firm a pollution quota of 60 tons every year, which allows each firm dump the specified amount of pollution without being fined. That means that each firm must reduce its pollution by 60 tons per year. a) If the two firms can trade the pollution quota amounts, what will be the equilibrium price and quantity traded? Which firm will sell the quota amounts? $MC MC(First) MC (Imperial) 80 50 0 30 45 60 90 Quantity of pollution reduction per firm a) 80, 45, First b) 80, 45, Imperial c) 50, 90, First d) 50, 30 Imperial e) 50, 30, First Answer: d) Each firm would pollute 120 tons in the absence of government regulation. There are 60 tons of permits, however, sold to each firm by the government. Thus, the starting point for either First or Imperial is 60 tons of pollution reduction in the diagram. Notice that the axis on the diagram is tons of pollution REDUCTION, not tons of pollution. It’s more expensive for First to reduce pollution as First’s MC is higher than Imperial’s. So both firms may benefit from trading permits since First can save from the high cost of abating pollution and Imperial can make money by selling pollution permits. They negotiate on a price level at which the number of permits sold by Imperial equals to the number of permits bought by First. The price level is $50 per permit at which Imperial is willing to sell 30 permits and reduce pollution by 90 tons by itself. First is willing to buy 30 permits at the price of $50 per permit and only reduce pollution by 30 tons. So the correct answer is d). 2) Suppose that two of your friends, Mary and Jane, are having a problem: Mary wakes up at 6am every morning and sings at the top of her lungs while in the shower. Jane on the other hand loves to sleep at 6 am. Besides being terribly inconsiderate, Mary’s behavior is particularly rude because she is staying in Jane’s apartment rent-free as a temporary favor. A private solution to the problem will likely include:...
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- Winter '08
- Economics, Externality, Marginal social benefit, efficient output level, palm trees