practice_problem6_jenny - Practice Problem 6 Suppose we...

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Unformatted text preview: Practice Problem 6 Suppose we have the same problem as in the numerical example, but v = 0 , so producers aren't taking into account the negative externality created by their production. Assume that k new = 20 , while the old technology is free, or k old = 0 . As we saw in the exercise, the maximum WTP for the new technology is 14, so the new technology is not adopted when pollution is free or not taxed or v = 0 . The government wants to tax pollution at a level to ensure that the new technology is adopted. What is the minimum tax? Remember that the new technology e ectively is not taxed because it creates no pollution 1 . To solve, you will want to calculate the optimal production level with the old technology with a pollution tax= v , keeping v as a part of your solution. Use optimal production with the old technology to calculate pro ts with v . Assume that the individual will adopt the new technology as long as pro ts are equal to pro ts under the old technology with a tax. Solve forold technology with a tax....
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