Question 4: Permits for Carbon Emissions (5 points total)
- Answer parts a) to e) based on the graph of a firm's MAC below. Assume the firm has historical emissions of 10 units of carbon and the government regulator gives the firm 7 permits to pollute 1 unit each.
- Assuming the firm is given 7 permits to pollute by the regulator, what market price of permits would incentivize the firm to not buy or sell any permits? (1 point)
- If the market price for permits is $8, does this firm buy or sell permits? (0.5 points)
How many? (0.5 points)
- Calculate the extra profit (or cost savings) the firm receives from participating in the permit market given their initial allocation of permits (7) and the market price of $8. (0.5 point)
Shade and label the area on the graph that represents your numerical answer. (0.5 point)
- If the market price for permits is $2, does this firm buy or sell permits? (0.5 points)
How many? (0.5 points)
- Calculate the extra profit (or cost savings) the firm receives from participating in the permit market given their initial allocation of permits (7) and the market price of $2. (0.5 point)
Shade the area on the graph that represents your numerical answer. (0.5 point)
Question 5: Multiple Choice (2 points total)
5a. When emissions from multiple sources do not mix uniformly, it implies that the marginal benefits of abatement may vary and therefore a uniform tax will not necessarily be cost-effective.
- True
- False
5b. Policy creating pollution standards where regulators have full information is:
- A. Preferred by firms, but not by society as a whole because it is inefficient
- B. Always inefficient because of the extra burden it places on firms
- C. Efficient, but not preferred by firms because it raises their costs
- D. Efficient and preferred by firms compared to a tax policy
S 107 6
MAC
8
7
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2
1
0
1
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10 Abatement