Homework on Environmental Economics

1. Draw a graph showing the private marginal cost, social marginal cost, private marginal benefit, and social marginal benefit of gasoline when there is a negative externality – for example, dirty exhaust from a tailpipe. Assume that neither supply nor demand is perfectly elastic or perfectly inelastic. [pic]

2. If government chose to tackle the problem by taxing the sellers of gasoline a constant tax per gallon sold, show these things on your graph:

a. the tax b. the new equilibrium price and quantity [pic] 3. Is the increase in price equal to the tax per gallon? Use your graph to answer this question. Yes it should be unless there are additional taxes 4. Is there any way to figure out if the tax is equal to the external cost of the gasoline?

5. Consumers obviously have less money left, after they buy gasoline, as a result of the tax. Give an example of something government can do to help consumers, while maintaining the tax and its resulting disincentive for purchasing gasoline. What are the pros and cons of your idea?

Government can do things to make it so people don’t have to use cars, like improve public transit, by putting in bus lanes and promoting alternative methods of transportation like better bike routes with lanes and traffic lights for bikers. This would be good in the sense that we are making solid infrastructure investments, but it would be bad in the sense that it would not directly bring down the costs of those taxes.

6. These two companies can reduce their emissions of greenhouse gases for the total cost shown. Complete the columns for marginal cost.

| |PLANT A |PLANT B |
|reduction in emissions |total cost of reducing |marginal cost of reducing|total cost of reducing |marginal cost of reducing|
|(for each plant), in tons|emissions |emissions |emissions |emissions |
| |y=x2+x |y=2x |y=2.5x2+7.5x |y=5x+5 |
|0 |$0 |-- |$0 |-- |
|1 |$2 |$2 |$10 |$10 |
|2 |$6 |$4 |$25 |$15 |
|3 |$12 |$6 |$45 |$20 |
|4 |$20 |$8 |$70 |$25 |
|5 |$30 |$10 |$100 |$30 |

7. The government sets a target for total emissions reduction of 6 tons. It decides to set a quota for greenhouse gas reduction, such that it requires each plant to reduce emissions by 3 tons. What is the total cost of the reductions under this program?

We expect that the Total Cost of Reducing Emissions Function to yield a Total Cost of $42 when emissions Reductions are 6 tonnes.

8. Now, government scraps the quota program, and instead decides to run a marketable permit program for greenhouse gases. As a result, government will sell permits to Plants A and B to emit greenhouse gases, for $11/ton. These plants can only emit the amount of greenhouse gases that they have permits for. How many permits will each plant want to buy?

Plant A will want 6, Plant B will want 2

9. How much have emissions fallen as a result of the marketable permits program? What is the total cost of emissions reduction for this program (for the actual amount of cleanup that get done)? Compare this to the amount of emissions reduction and the cost of cleanup under the quota program (question 7).

Emissions have fallen by 8 tonnes total under the program. The Total cost for this level of emissions is $88.