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Unformatted text preview: Second Challenge: Solutions Environmental Economics: ECO 345 Fall 2011 Question 1 (9 points) A small change in emissions resulting in large damages via a threshold implies marginal damages are steep. This favors permit regulation. Permit regulation fixes the total number of permits. If we set the number of permits small enough to ensure we do not cross the threshold, damages remain low. However, with a tax if marginal costs turn out to be high, many firms will pay the tax rather than reducing emissions. This can result in emissions crossing the threshold, causing very high damages. Question 2 (18 points) a. Permits and emissions standards clearly fix emissions. Technology standards fix the technology and therefore emissions per unit, but not total emissions. The EPA is never sure how many CFL light bulbs people will buy, or how long the lights will stay on, for example. Pigouvian taxes do not fix emissions, as the EPA is never sure how many firms will pay the tax and how many will reduce emissions. b. Only Pigouvian taxes fix marginal costs, which are equal to the tax. As we saw, if the marginal compliance costs are high, permit prices an therefore marginal costs will rise. The same principle holds for emissions standards and technology standards....
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This note was uploaded on 01/08/2012 for the course ECO 345 taught by Professor Kelly during the Fall '11 term at University of Miami.
- Fall '11
- Environmental Economics