1) (30 points) A policy maker is faced with the following MDF from the emissions
ID: 1192033 • Letter: 1
Question
1) (30 points) 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) (5 points) What will be the perceived economically efficient target of emissions? b) (5 points) What is the emissions fee that generates that target? c) (5 points) What is the aggregate level of permits that generates that target? d) ( 5 poits) If there is a thick market for permits, what will be the market price of a permit? e) (5 points) The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using an emission fee. f) (5 points) The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using cap and trade. (note: there is an attached graph at the end of this document which students can use to find or draw the answers). 2. (10 points) U.S. policy to increase the miles per gallon (mpg) of new cars is to mandate an average mpg for cars sold by U.S. manufacturers. In many countries within the European Union, the policy is to tax gasoline so that the price per gallon at the pump is stable around $4.50 per gallon. Which policy is more to be successful at the least cost? Explain. 3) (10 points) What role, if any, do property rights (efficient or inefficient) play in designing and implementing environmental policy? Explain.
Explanation / Answer
a) For economically efficient target of emissions MDF = MAC so 1000E = 130000 = 1000E so E = 65
b)Emissions fee can be calculayed as MDF = 1000*65 = 65000
c) Aggregate level of permit = MDF*E = 65,000*65 = 4225000
d) If there is thich markets for permits then market price of permits will go up.
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