AREC 202 Quiz 12 Study Guide

What is the socially optimal outcome?

Firm A decreases pollution by 3 tons, B by 2 tons, C by 1 ton, for a total of 6 tons.

Leaving this market to itself without government regulation, by how much would each firm decrease its pollution? By

0 tons.

Third policy: the government implements a tax of $10.10 per ton a firm still emits. How much will the three firms combined decrease their pollution? By

6 tons.

Fourth policy: the government auctions off permits for each ton still emitted. Which price range for the permits will result in exactly 6 permits being demanded?

$10.10-$14.90.

First policy: The government orders all three firms to decrease pollution by 2 tons each. What is the total cost of decreasing pollution to the three firms combined?

$47 (=2+5+5+10+10+15)

Second policy: the government implements a tax of $5.10 per ton a firm still emits. How much will the three firms combined decrease their pollution? By

3 tons.

Why is decreasing pollution a public good?

Because it is non-rival and non-excludable.

What summarizes best how economists feel about policies like the tax or the permit system in these questions (assuming tax or number of permits are set at the optimal level)?

Economists like the tax or the permit system because these policies give incentives to firms to decrease pollution to its socially optimal level at the least cost.

Fifth policy: assume the government hands out firms A, B and C two permits each for free, but these permits can be traded after they are handed out. Of course, for each permit a firm sells it has to decrease its pollution by one more ton, but if a firm buys an additional permit then it does not have to decrease its pollution by one ton. What will most likely happen in the market for permits?

Firm A will sell firm C for a price between $10 and $15.