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2. (25 points) The U.S. wants to design a more efficient policy to control greenhouse gases, particulates, and toxic compounds such as mercury. The regulator
2. (25 points) The U.S. wants to design a more efficient policy to control greenhouse gases, particulates, and toxic compounds such as mercury. The regulator estimates the marginal benefit to the electricity producer from burning coal (X) at electric plants to be MB(X) = 100 - 4X (You can think of this as the marginal abatement cost for reducing pollution, which is avoided if the firm is allowed to pollute.). Suppose the marginal social cost of burning coal is MSC(X) = 10 + X (You can think of this as the marginal benefit to society of reducing emissions). The regulator wants an efficient policy and can select between a tax and a standard. a. Based on the information available on benefits and costs associated with emissions, what pollution tax (t*) would the regulator set to obtain the social optimum? What pollution standard (X*) would the regulator set to obtain the social optimum? b. Suppose the marginal benefit of burning coal (X) is actually MB(X) = 90 - 4X. What is the actual outcome in reduced emissions that will occur under a tax oft* and under a standard of X*
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