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Unformatted text preview: Homework 2 Environmental Economics: ECO 403 Due: Wednesday, October 19, 2011 Question 1 Suppose that old cars and new cars are required to pass identical emissions tests in California. Cars that fail must reduce emissions and old cars can reduce emissions at a marginal cost of $10 per kilogram of emissions. New cars can reduce emissions at $5 per kilogram. a. Does the emissions test regulation reduce emissions in the least costly way? Explain. b. Explain how to use vintage differentiated regulation to achieve the same emissions at lower cost. Which type of car should have stricter emissions tests? c. Give one possible problem with vintage differentiated regulation in this context. Question 2 Below are several ways to reduce gasoline consumption. For each, does a gas tax provide an incentive to reduce gas consumption in this way? For each, do CAFE standards provide an incentive to reduce consumption in this way? If so, explain how. a. Car-pool. b. Make sure tires are properly inflated. c. Buy a new car which is more fuel efficient. d. Give 3 more ways to reduce consumption and answer the same questions. Question 3 A monopolist produces a good Q and faces costs, demand, and marginal revenue curves of: TC ( Q ) = Q 2 , (1) MC ( Q ) = 2 Q, (2) P = 8- Q, (3) MR ( Q ) = 8- 2 Q. (4) 1 Suppose now that production of Q generates emissions which cause constant marginal dam- ages of $2....
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- Fall '11
- Environmental Economics