436 Problem Set 4 Answers SU19.pdf

When tradable permits are used polluters with low

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When tradable permits are used, polluters with low costs of emissions abatement will sell permits to polluters with higher costs. If marginal damages are positively correlated with marginal benefits, then polluters with lower costs of abatement will also tend to have lower marginal damages. Therefore, the sale of permits will result in a reduction in emissions that have lower marginal damages and an equal increase in emissions that have higher marginal damages. Therefore, total environmental damages will be larger than if the permits were not tradable. II. Suppose that emissions of a greenhouse gas are proportional to the output of a perfectly competitive industry and it has been decided to reduce pollution by one-half using tradable permits. A. Imposition of the regulation will increase the price paid by consumers and decrease the net price received by suppliers. 1. Explain why. Because pollution is proportional to output, reducing pollution by one-half using tradable permits will reduce the amount of output by half. Making the usual assumption of a downward sloping demand curve and an upward sloping supply curve, the decrease in quantity will increase the price paid by consumers and decrease the net price received by suppliers. 2. If the difference between the price paid by consumers and the net price received by suppliers is $2.00, the elasticity of supply is 1.5, and the elasticity of demand is 1.0, how much will the price paid by consumers increase?
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