Write a short 200 word essay to answer each of the following questions using a adequate diagrams/documentation as necessary:
Monopolies and cartels are usually associated with economic inefficiencies and dead weight losses. With a common-pool resource, on the other hand, asset values are non-existent and resources are depleted more quickly than would be optimal (suggesting very high implicit discount rates). How might the output quotas of an international cartel, like OPEC, affect resource conservation and the speed of depletion?
European countries have relied to a much greater extent on emission charges than the United States has, which seems to moving toward a greater reliance on transferrable emission permits. From an efficiency point of view, should the United States follow Europe's lead and shift its emphasis toward emission charges? Why or why not?
Why does a fuel tax reduce oil consumption more than higher fuel efficiency standards? Should gas taxes be higher? How many kg of CO2 would you emit travelling 250 km by conventional gas powered car?
Part II
1. There are only two polluting sources in the region, each of which generates 10 units of pollution for a total of 20 units released into the environment. The government determines that emissions must be reduced by 10 units across the region to achieve the "socially desirable level of pollution". Each firm faces different abatement cost conditions modeled as follows:
Polluter 1:
Marginal Control Cost: MCC1 = 2.5Q1
Total Control Cost: TCC1 = 1.25(Q1)²
Polluter 2: Marginal Control Cost: MCC2 = 0.625Q2
Total Control Cost: TCC1 = 0.3125(Q2)²
Where Q1 is the amount of pollution controlled (abated) by Polluter 1, and Q2 is the amount of
pollution controlled (abated) by Polluter 2.
a) What is the cost effective abatement allocation across polluting sources? What is the total cost to achieve this goal?
b) Assume that the government implements the 10-units standard uniformly, requiring each polluter to abate by 5 units. What is the total cost to achieve this goal? Is it more / less than the total cost from part a)? Comment on your findings.
c) Now assume that the government imposes emission charge set at $4 for each polluter. Show how each firm responses to tax. Does $4 unit tax achieve the 10-unit abatement standard?
d) Government finally decides to issue permits rather than impose tax. It issues 10 permits, each of which allows the bearer to emit 1 unit of pollution. The government allocates 5 permits to each polluter.
(d.i) If the permits system does not allow for trading, what would be each firm's response - cost, abatement required to this allocation?
(d.ii) Assume now that trading is allowed and that two firms agree on the purchase and sale of permit at a price of $8.00. What would be each firm's response - cost, abatement required, revenue to this price?
(d.iii) Does the outcome from part (ii) represent the cost effective solution? If yes - why? If not, describe what happens next.
e) Compare and contrast outcomes from part b) - d). Which instrument would you recommend to government to achieve goal of emission reduction by 10 units?
2. Suppose the marginal benefits (social and private) and costs (social and private) per gallon of gasoline in Canada are modeled as follows to illustrate the negative externality of gasoline combustion:
MSB = 12.80 - 0.42Q
MPB = 12.80 - 0.4Q
MSC = MPC = 1.25 + 0.02Q
(where Q is millions of gallons)
a) State the equation that represents the market externality. Give the economic interpretation of this equation, using its specific numerical value(s).
b) Find the efficient equilibrium, PE and QE, for this market. (Do not round)
c) Find the dollar value of a per-unit gasoline tax that would achieve the efficient solution, and calculate the tax revenues generated to the government as result.