2. Suppose the world consists of 15 countries, all of which would benefit from a

Question

2. Suppose the world consists of 15 countries, all of which would benefit from a reduction in global CO2 emissions. There are 5 island countries, which have high marginal benefits from emissions reductions. Each island country experiences constant MB-20. The 10 remaining countries each have constant MB of MB-4. All countries can control emissions at MSC-2q, where q is the amount of emissions reduction each country does. (a) If there is no international agreement to control CO2, each country will look after its own interests only (setting its MB- MSC). How much reduction will island countries do in this case? How about the remaining countries? (b) What is the total global emission reduction, Q? (Q is the sum of the emission reductions of the 5 island and 10 other countries.) (c) What are the (global) marginal social benefits of emission reductions? (d) Given this MSB, what is the globally optimal reduction q for each country to undertake? How does the resulting total emission reduction Q compare with the reduction in (b)? Why?

Explanation / Answer

a) Island countries
20 = 2q
q = 10

Rest of the world
4 = 2q
q = 2

b) Total reduction = (5x10) + (10x2) = 70

c) Global Marginal Social Benefit = 5x20 + 10x4 = 140

d) Global Marginal Cost = 15 x 2q = 30q
Globally Efficient Level
140 = 30q
q = 4.67

Total Reduction = 4.67 x 15 = 70

It is equal to the reduction in b)
This is because when each country sets efficient level of emission reduction, it results in globally efficient level of emission reduction.

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