1. Sulfur emissions from coal fired electricity plants form sulfuric acid that damages crops, forests, lakes and other parts of the environment. Since 1995, the US has operated a sulfur oxide permit market has reduced sulfur emissions to less than half their 1980 level.

a. Give two reasons why, if the coal fired electricity suppliers and their marginal damage had certain characteristics, a permit system for reducing sulfur emissions would probably be less socially efficient than a regulation requiring the same percentage reduction in emissions every year at every coal fired electricity plant. What characteristics of the suppliers and their marginal damage would make that conclusion likely? Why would they make it likely?

b. Give two reasons why, if the coal fired electricity suppliers and their marginal damage had certain characteristics, a permit system for reducing sulfur emissions would probably be less socially efficient than a sulfur emssions tax that stayed fixed. What characteristics of the suppliers and their marginal damage would make that conclusion likely? Why would they make it likely?

c. Describe possible characteristics of the coal fired electricity suppliers and their marginal damage which, if they have them, make it likely that a permit market is a more socially efficient policy for reducing sulfure emissions than either alternative policy in part a and b. Draw possible demand, supply and social marginal cost curves for coal fired electricity in a way that matches the characteristics you have described. Explain why the graph matches those characteristics and why those characteristics make a permit system likely to be the most socially efficient policy of the three.