Economics of the Environment

Question 1 (4 points)
What kind of standard would you recommend for a nonpoint pollution source (e.g., runoff of pesticides from agricultural and home use) where emissions per polluter cannot be measured? Explain why.

Question 2 (6 points)
Suppose we institute an emission charge on a particular pollutant, and we use the proceeds of the tax to help subsidize the short-term capital costs by firms in the same industry of installing emission-reduction equipment.  Will this approach upset the incentive effects of the emission tax?

Question 3 (12 points)
Consider two firms which are polluting the air near some city.  The marginal damage costs of the pollution are MDC = 2e where e is the rate of emissions.  The marginal costs of abatement, including some government information costs, are MAC = 120 - e.
a.	Determine the optimal level of emissions.
b.	Suppose that firm 1 is emitting 60 units as is firm 2.  The marginal abatement costs for firm 1 are   MAC1 = 1.5 X1 and the marginal abatement costs for firm 2 are given by MAC2 = 0.5 X2 where X1 is measured in units of emission reduction for firm 1 and X2 is measured in units of emission reduction for firm 2.  Determine the cost effective allocation of pollution between the two firms.  Draw a diagram illustrating the allocation of pollution between the two firms.
c.	Suppose that the government decides that each firm should be allowed to emit only 1/2 of the 	optimal level of emissions.  Illustrate on your diagram, the costs associated with this policy.

Question 4 (11 points)
The Praline River runs past the town of Notlob.  Firms near Notlob discharge pollutants into the river.  Residents of Notlob use the river for recreational activities.  The marginal costs for the polluting firms are;
	MAC = 2500 - 15 e
where e measures the quantity of emissions.
Notlob face marginal damage costs, caused by the emissions, of;
	MDC = -100 + 10 e.
a.	Find the optimal level of pollution.
b.	Suppose the regional government imposes an emissions tax upon the polluters.  What tax rate will they 
        impose?  What will be the tax payment that the polluters will have to make?
c.	Suppose instead the regional government imposes a cap and trade system.  How many permits will they 
	issue?  What will be the price of the permits?

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