D, E and F 1) A policy maker is faced with the following MDF from the emissions
ID: 1190909 • Letter: D
Question
D, E and F
1) A policy maker is faced with the following MDF from the emissions of nitrous oxide: MDF = 1000 E (where E = tons of emissions). Research leads the policy maker to perceive that the industry MAC function is MAC = 130,000 – 1000E
a) What will be the perceived economically efficient target of emissions?
1000E = 130,000 – 1000E
2,000E = 130,000
E = 130,000 / 2,000
E = 65
b) What is the emissions fee that generates that target?
Emission fee = MDF = 1,000E = 1,000 × 65 = 65,000
c) What is the aggregate level of permits that generates that target?
Aggregate level of permit = MDF × E
= 65,000 × 65
= 4,225,000
d) If there is a thick market for permits, what will be the market price of a permit?
e)The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using an emission fee.
f) The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using cap and trade.
Explanation / Answer
e) 1000E = 150000 -500E
E= 100
Difference in emission fee = 100000 - 65000 = 35000 (cost of error)
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