Homework 8 Answer Key
Homework 8 Answer Key
Homework 8 Answer Key
a) Write the damage function, giving damages as a function of total sulfates deposited.
(12 points)
b) Write the transfer coefficients for England and Denmark. (12 points)
c) First ignore the effects of pollution on Sweden and suppose we simply want to reduce
emissions by 12 tonnes. How much of that reduction should come from Denmark, on the
basis of cost efficiency? (12 points)
We know that we cost effectively allocate abatement when the marginal abatement costs
are equated so:
MCD = 1qD = 2qE = MCE
From the equimarginal principle, we see that qD = 2qE , so we can plug this into the total
abatement equation
qD + qE = 2qE + qE = 12
3qE = 12
qE = 4
qD = 12 − 4 = 8
Since Denmark has lower marginal abatement costs, Denmark should undertake more
abatement than England.
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d) Now suppose we want to reduce emissions by 12 tonnes but we want to do it in a way
that takes into account effects on pollution in Sweden. Although this might not be the
right about of pollution reduction, balancing the marginal cost of controlling pollution in
Sweden from the 2 source countries would require how much of an emission reduction in
Denmark? (13 points)
Now we still use the equimarginal principle, but it is in terms of ambient concentrations
instead of emissions. To do this, we scale the marginal abatement costs by the transfer
coefficients.
6) Two identical firms save money from polluting. A firm’s marginal savings from
emitting an amount e are given by 10-2e. The two firms differ in their impact on ambient
pollution. Two units of emissions from firm 1 result in one unit of ambient pollution.
Firm 2 has twice the impact on the ambient environment from the same amount of
emissions.
a) What are the transfer coefficients? (16 points)
1
- X = e1 + 1e2
2
- The transfer coefficient for firm 1 is ½ and the transfer coefficient for firm 2 is 1.
b) If firm 1 is given 2 emission permits and firm 2 is given 4 emissions permits and they
are allowed to trade, how many permits will each firm end up with and what will be the
price? (16 points)
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e1 + e2 = 6
e2 = 6 − e1
e1 = 6 − e1
e1* = 3 = e*2
P = MS1 = MS2 = 10 − 2(3) = 4
e1*=3
10
MS1
MS2
P=4
e1=2 e1*=3
e2=4 e2*=3
c) If instead, each firm is given 2 ambient pollution permits and trading takes place, how
much will each firm end up emitting and what will be the permit price? (17 points)
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5 1 1
e1 = + 4 − e1
2 2 2
5 1
e1 = + 2 − e1
2 4
5 9
e1 =
4 2
18
e1* =
5
1 18 9 11
e2* = 4 − = 4 − =
2 5 5 5
MS1 MS2 11 50 − 22 28
P= = = 10 − 2 = =
a1 a2 5 5 5
MS 2
MS1
a2
a1
P=28/5
e1*=18/5
e2*=11/5
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