Calculate the demand for pollution permits for each firm.

CAS EC 571 Environmental Economics Fall 2021 – Prof. Bahar Erbas
Homework Assignment #2 (Total 120 Points)
First and Last Name: _______Student ID#: _______ Date: _
Assignment Date: November 14, 2021 Due Date: November 29th, 2021, Monday, by 5:00pm. This is a hard deadline with no excuse. After 5:00pm all submissions will follow penalty rules with delayed submission. Please take into account the possibility of technical issues and/or illnesses, and submit your homework at an earlier time. There will be only Electronic submissions on the link ‘Fall 2021 HW#2 Assignment’. Email submissions will not be accepted as the grading requires a blackboard submissions. Instructions: 1. Please provide your solution, explanation and drawing when necessary. 2. Please write clearly. If your answers are not readable, then it will have zero points. 3. Graphs: Please label the axes, lines, curves and areas correctly. Graphs with no labels will not receive any points.
Q.1. (20 Points) The following marginal benefits and costs are estimated for production and consumption of a product.
Consumption Production
MPB = 74 − 0.5.Q (Mrg. Private Benefit) MSC = 4 + 0.4.Q (Mrg. Social Cost)
MEB = 26+ 0.1.Q (Mrg. External Benefit) MEC = 0.2.Q (Mrg. External Cost)
a. Find the competitive equilibrium. b. Find the Pareto efficient equilibrium. c. Find the dollar value of a product charge that would achieve and efficient solution.
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Q.2. (30 Points) Suppose that under the Michigan’s voluntary emission trading program, the objective is a 50 percent reduction in carbon monoxide (CO) emissions from 120 units to 60 units for a two firm industry. Each firm face the following total and marginal abatement costs, respectively TAC and MAC, measured in thousands of dollars:
Firm 1: TAC1=2000+0.6(A1)2 MAC1=1.2.A1
Firm 2: TAC2=1000+0.2(A2)2 MAC2=0.4.A2,
where A1 and A2 represent the percentages of CO emission abatement achieved by Firm 1 and Firm 2, respectively.
a. Calculate the TAC and MAC for each firm if a uniform abatement standard were used.
b. Based on your answer to part a, is there an economic incentive for the sources to participate in the trading program? Explain.
c. Quantify the cost savings associated with a cost-effective abatement allocation that could be achieved through trading.
d. Calculate the demand for pollution permits for each firm.
e. Write down the market demand for pollution permits and market supply for permits.
f. Calculate the permit price.
g. Calculate the abatement levels and emission levels of each firm.
h. If the government issues 60 allowances (tradable permits) and equally distribute them among the firms, write down which firms is a buyer and which firm is a buyer and which firm is a seller?
Q.3. (30 Points) Read the article by Jeffry A. Frankle (2003) “The Environment and Globalization,” NBER, http://www.nber.org/papers/w10090. Provide a summary of the article, in your own words, in a single page include the key links between the Environment and Globalization.
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Q.4. (30 Points) Suppose that Environmental Protection Agency (EPA) tries to decide whether it should choose pollution tax or non-tradable emission licenses. The EPA economists estimate the marginal damage from pollution as 𝑀𝐷 = 2.𝐸 + 10, where 𝐸 is the emission level in the industry. However, EPA is not being able to observe the true marginal abatement cost and assumes one based on the information gathered from the industry. Whereas the true marginal abatement cost is 𝑀𝐴𝐶𝑇𝑟𝑢𝑒 = −1.5.𝐸 + 60, the EPA assumes that marginal abatement cost is 𝑀𝐴𝐶𝐴𝑠𝑠𝑢𝑚𝑒𝑑 = −𝐸 + 70 based on the information reported by the industry. Answer the following questions.
a. Suppose EPA uses emission tax given the assumed marginal abatement cost as a tool to regulate emissions. Calculate the emission level, 𝐸𝐻, and 𝑡𝐻 that are believed to be efficient.
b. If EPA imposes 𝑡𝐻 that you have calculated in part a, what would be the actual emission level, 𝐸𝑇, in the industry?
c. If EPA would have true information on marginal abatement cost, what would be the efficient emission tax, 𝑡∗, and emission level, 𝐸∗, in the industry?
d. If EPA uses non-tradable emission licenses to restrict the emissions to 𝐸𝐻, calculate the efficiency loss due to uncertainty over marginal abatement cost that would arise?
e. If EPA uses emission tax of 𝑡𝐻, calculate the efficiency loss due to uncertainty over marginal abatement cost that would arise?
f. Illustrate 𝑀𝐷, 𝑀𝐴𝐶𝑇𝑟𝑢𝑒, 𝑀𝐴𝐶𝐴𝑠𝑠𝑢𝑚𝑒𝑑, 𝑡𝐻, 𝑡∗, 𝐸𝐻, 𝐸𝑇, 𝐸∗ on the graph. Shade areas of efficiency losses in part d and part e.
g. Under this type of uncertainty, which regulatory tool that you recommend EPA to choose, emission tax or non-tradable emission licenses?
Q.5. (10 Points) It is well documented that the carbon monoxide (CO) emissions from combustible engines increase in colder climates. This implies that the associated damages are expected to be less severe in summer months than in winter. Nonetheless air quality control authorities use a standard for CO that is uniform throughout the year with no allowance for seasonal effects. Use the following model to decide what action would you recommend to ensure an allocatively efficient outcome across the two seasons:
MSB of CO abatement in winter = 360-0.5A
MSB of CO abatement in summer = 140-0.2A
MSC of CO abatement = 0.2A, where A is the level of CO abatement.