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Unformatted text preview: Review Solutions: Final Challenge Environmental Economics: ECO 345 Question 1 a. Standards have no RRE. The TIE generally increases optimal emissions. Overall op- timal emissions therefore exceeds E . b. Taxes have a RRE which decreases optimal emissions. The TIE generally increases optimal emissions. Overall optimal emissions relative to E is therefore ambiguous, but in practice the TIE tends to dominate. c. There is no revenue recycling effect since permits are given away. The tax interaction effect tends to decrease optimal emissions, since less SO 2 encourages working through less sick days. Overall, then the optimal emissions are below E . Question 2 Environmental regulation tends to raise the price of the underlying dirty good (e.g. elec- tricity). Higher goods prices means wages buy less, which makes working less attractive. Households reduce labor supply, which reduces labor tax revenues. The government must therefore raise labor tax rates to make up the revenue, which induces a welfare loss. Question 3 a. Not consistent. Marginal costs will rise by more than marginal benefits and so emissions will increase. b. Consistent. Marginal costs will rise by less than marginal damage equal to willingness to pay. Emissions will decrease. c. Not consistent. Economic growth will result in more pollution causing factories, but the EPA still will not be able to enforce environmental laws, so pollution will increase....
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- Fall '11
- Environmental Economics