ECON 260 Assignment 2 Answer Key

QUESTION ONE

Part (a)

 

ECON 260 Assignment 2 Answer Key

 

ECON 260 Assignment 2 Answer Key

 

Under the uniform standard, each polluter will have to emit 6.5 units of pollution (will have different amounts of abatement) The social and private costs are equivalent because there are no other costs beyond the TAC’s for each firm

Firm 1:

MAC1 = 300x(15 – 6.5)=300x8.5 = 2550 TAC1 = (8.5)(2550)/2 = 10,837.50

Firm 2: MAC2 = 100(10-6.5) = 100 x 3.5 =350 TAC2 = (350)(3.5)/2 = 612.50 Total social or private costs = 11,450.00

ECON 260 Assignment 2 Answer Key

 

ECON 260 Assignment 2 Answer Key

Question 3

a) Aggregating the MAC’s

MAC1 = 120 – E1 MAC2 = 96 –.8E2 MAC3 = 160 – 1.33E3

Re-write as

E1 = 120 – M E2 = 120 – 1.25M E3 = 120 – 0.75M

ET = E1 + E2 +E3 = 360 – 3M or MAC = 120 – 1/3E

b) Social Optimum is MD = MAC or E* = 120 c) Uniform standard: E1 = E2 = E3 = 40 MAC1 = 80, MAC2 = 64 MAC3 = 106.8

TAC1 = 3200 TAC2 = 2560 TAC3 = 4272

d) Tax is found where MD(120) = (2/3)(120) = 80

E1 = 40, E2 = 20, E3 = 60

TAC for each is:

TAC 1 $3,200 TAC 2 $4,000 TAC 3: $2,400

e) For Marketable Permits the Equilibrium price will be $80 (Same as the tax). The emissions and total abatement costs will be the same as the tax case. However, their NET total cost will differ, depending if they are net buyers or sellers:

Allocated Buy or Permit Costs Net Total costs

Permits Sell  (neg if net seller) (TAC & Permits bought/Sold)

Firm 1 E = 40 40 0 TAC1 $3,200 Permits1 $0 TC 1 $3,200Firm 2 E = 20 40 ‐20 TAC2 $4,000 Permits2 ‐$1,600 TC 2 $2,400Firm 3 E = 60 40 +20 TAC3 $2,400 Permits3 $1,600 TC 3 $4,000

ECON 260 Assignment 2 Answer Key

Uniform Optimal Permits AllocatedEmissions Standard Tax = 80 Price = 80 Permits

E1 40 40 40 40E2 40 20 20 40E3 40 60 60 40

MAC'sMAC1 $80 $80 $80MAC2 $64 $80 $80MAC3 $107 $80 $80

TAC'sTAC1 $3,200 $3,200 $3,200TAC2 $2,560 $4,000 $4,000TAC3 $4,267 $2,400 $2,400

Permit Costs (neg if net seller)Permits1 $0Permits2 ‐$1,600Permits3 $1,600

Net Total costs (TAC & Permits bought/Sold)TC 1 $3,200TC 2 $2,400TC 3 $4,000