Resource Economics 262 Problem Set 3 15 points Due February 25 2021 4 pm Two versions of this assignment are posted a Word version and a pdf version You may either 1 type your answers directly on the Word version convert that to a pdf and submit the pdf version or 2 write your answers on a separate document convert that to a pdf and submit the pdf You must submit a pdf copy Do not simply cut and paste material from my lectures Please include your name and your student ID number on your submission Also name the file you submit your full name RESECON262HW 3 pdf 2 3 30pm office hours Please make sure that you upload and submit your assignment when you are done Warning for MAC users Graphs in this assignment may not convert correctly if you download the MSWord version of this document with a program other than Microsoft Office I believe you can install a free version of Microsoft Office through UMass IT Alternatively you can download the pdf version of the assignment write your answers in a separate document convert that to pdf and submit that document Note All of the questions in this assignment come from Unit 4 1 1 In the following table are the marginal abatement costs of two firms Note that an entry in the table indicates the cost of reducing emissions by one unit from the previous level For example 300 is the additional abatement cost for firm 1 to reduce its emissions from 3 tons to 2 tons and 40 is the cost for firm 2 to reduce its emissions from 7 tons to 6 tons Marginal Abatement Costs Total Abatement Costs Firm Emissions 10 9 8 7 6 5 4 3 2 1 0 Firm 1 0 40 80 120 160 200 240 260 300 340 380 Firm 2 0 10 20 30 40 50 60 70 80 90 100 Firm 1 0 20 80 180 320 500 720 910 1200 1530 1900 Firm 2 0 5 20 45 80 125 180 245 320 405 500 1 1 Suppose that the Environmental Protection Agency wants to reduce aggregate emissions of the firms to 10 tons by requiring each firm to reduce its emissions to 5 tons Explain why this will not be a cost effective way to reduce aggregate emissions to 10 tons A one or two sentence answer should suffice 1 point This would not be cost effective because firm one has a higher marginal abatement cost then firm two making one spend a large amount more than the other More specifically if they were both to reduce to 5 tons firm one would pay 200 while firm two would pay 50 1 2 How much would you allow each firm to emit if you wanted to reduce aggregate emissions to 10 tons cost effectively 1 point If I wanted to reduce aggregate emissions to 10 tons cost effectively firm 1 would emit 8 tons for 80 while firm 2 would emit 2 tons for 80 as well This would sum up to a total of ten tons and would be cost effective 1 3 Calculate the savings in aggregate abatement costs from using the cost effective way to allocate 10 tons of emissions instead of making the firms reduce their emissions to 5 tons each 2 points The savings in aggregate abatement costs from using the cost effective way would be as follows 250 160 90 2 What is wrong with the following statement 1 point If the benefit of a policy to control emissions of some pollutant is greater than the cost of control then the policy must be efficient 2 The issue with this statement is that benefits of a policy regarding control of admissions will always incur a marginal abatement cost In other words to say that a benefit is different than the cost of control is incorrect Benefits of controlling emissions will result in a cost of control the policy is efficient if it finds a more cost effective way of limiting emissions 3 Questions 3 1 through 3 5 ask you to use the graph below to examine the usual inefficiency of a policy that eliminates all damage from pollution 3 1 What is the maximum level of emissions that causes no damage That is identify the threshold level of emissions 1 point E1 is the maximum level of emissions that causes no damage 3 2 What is the efficient level of emissions 1 point E2 is the efficient level of emissions because it is where the marginal abatement cost and marginal damage intersect or are at equilibrium 3 3 What area s in the graph indicate the benefit of reducing emissions from the efficient level to the threshold level 1 point B is the area that indicates the benefit of reducing emissions from the efficient level to the threshold level 3 4 What area s in the graph indicate the cost of reducing emissions from the efficient level to the threshold level 1 point A is the area that indicates cost of reducing emissions from the efficient level to the threshold level 3 5 Use your answers about the benefits and costs of reducing emissions from the efficient level to the threshold level to explain why a policy to eliminate pollution damage is inefficient in this situation 1 point The reason why this is not an efficient solution from efficient level to threshold level for reducing emissions is because the accumulated net aggregate abatement cost is to large and therefore outweighs the benefits 3 4 For the pollutant illustrated in the graph below what is the efficient level of emissions Explain your answer 2 points There is no efficient level of emissions above 0 5 Suppose that the firms in some industry emit an air pollutant that harms people who are exposed to the pollutant This situation is illustrated in the graph below Now suppose that a new and cheaper emissions control technology becomes available and is adopted by the industry 5 1 Which function in the graph will change with the industry s adoption of the new emissions control technology the MAC or MD function 1 point The MAC function will change 5 2 Which way will this function shift up or down 1 point It will shift down because the new technology is cheaper 5 3 As a result does the efficient level of emissions increase decrease or stay the same 1 point It will decrease as the MAC function shifts down efficient level of emissions equilibrium will lower as well 4