Economics of Resource Use

Instructions: You may work in groups but you must turn in your own work! Indicate on the front page who you worked with (max 3 people). An electronic copy must be submitted online before midnight on Friday. Show all work so that partial credit may be given. This homework is worth 15 points total.

For the next 3 questions, consider the following abatement costs for 3 firms that are currently emitting 18 units of pollution collectively and 6 units of pollution each:

1. A regulator wants to cut pollution in half and so it puts a standard on the three firms to clean up 3 units of pollution each. What is the total cost of this policy? What is the benefit of implementing a standard compared to, say, a tax? What are the drawbacks? (3 points)

2. The government gets a lot of push back from Firm 2 who argues that the standard hurts his business much more than the other two firms. He thinks that the government could achieve pollution control at a much lower cost to himself and his competitors if the government were to instate a tax instead. What tax rate would achieve the same amount of pollution control as the standard (9 units of abatement)? Which firms are better off under this tax and which are worse off? What arguments might his competitors make against the tax? Explain fully. (3 points)

3. There is more and more evidence that pollution markets are the best way to regulate pollution from the firm’s perspective. The regulator decides to give it a shot. How many permits need to be distributed to get the same amount of control as under the previous policies? How many permits will each firm hold after trading? Are the firms happy? What about the regulator? Explain fully. (3 points)