hw3ee11 - Homework 3 Environmental Economics ECO 345 Due...

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Homework 3 Environmental Economics: ECO 345 Due: Wednesday, November 16, 2011 Question 1 The EPA has discovered high levels of BOD in a river. Both the turkey farm and the hog farm deny responsibility, and the EPA has no way to determine which firm is causing BOD levels to rise. Propose a regulatory scheme that induces the efficient emissions. Question 2 Suppose marginal damages and costs are as in the picture below. Would you recommend a Pigouvian tax, tradeable permits, a hybrid safety valve, or a hybrid price floor? Explain. E P MD ¯ MC MC H MC L Figure 1: Convex Damages. Question 3 Suppose firms say complying with CAFE standards is expensive (environmentalists claim complying is cheap). In response, the government modifies the CAFE standard so that if firms are below the MPG standard they pay a fine t per unit of MPG below the standard, as is currently the case, but if they increase MPG above the standard they receive a subsidy s per MPG above the standard. a. Suppose in period one, the government observes all firms above the standard and receiving subsidies. How should the government adjust the standard in the future?
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