Question
A4-9. Suppose there are 20 sources of pollution emissions, equally divided between two types. The unregulated emissions (Ei), total cost of abatement (TCAi), and marginal cost of abatement (MCAi) for the two types of sources are given below:
Type 1: E1 = 30 TCA1 = ½(A1)2 MCA1 = A1 Type 2: E2 = 30 TCA2 = ¼(A2)2 MCA2 = ½A2(a) The horizontal sum of MCA’s for the various sources is given by MCA = A/30 where A is the total abatement from all sources. If the marginal benefit to abatement is given by MBA = 50 – (4/30)A,calculate the efficient level of total abatement. What is MBA at this level? [4]
(b) Suppose the regulator implements this total abatement target by requiring each source to abate its emissions by an equal amount. In a diagram that shows the MCAi for each type, illustrate why this is an inefficient policy response. What is the total value of the deadweight loss from the misallocation of abatement? [Hint: Remember that there are 10 sources of each type.] [8]
(c) Suppose that, instead of the mandate, the regulator implements an emissions tax per unit equal to the efficient MBA calculated in part (a). How much would each type abate? Given the efficient tax, what is the total cost to each type (abatement costs plus taxes paid)? [6]
(d) Now suppose, facing the emissions tax, that each source has an opportunity to invest in a new technology that will eliminate their emissions, but will cost $225 per period. Which source(s) will adopt the new technology? What is the new total quantity of abatement? cost per source?. [6]
(e) Is there a signal to the government that this technological change has taken place? [2]
A4-11. There are many observers of the Canadian economy who fear that policies of the incoming US administration will have negative consequences for the Canadian economy – even to the point that these policies will push the Canadian economy into recession. If these fears are borne out, what would you expect to happen to real national income and its growth rate over the next few quarters? What is likely to happen to the output gap? the unemployment rate? Briefly explain. [8]
