6. Environmental Policy. Use the diagrams below to answer part a) and b). a) Negative externality (5 marks). Good A emits pollution which imposes an external cost of $3 per unit. (i) In the Good A diagram below draw a social marginal cost curve and indicate the efficient level of output and the deadweight loss associated with the competitive equilibrium. (ii) Show how a $3.00 tax can eliminate the deadweight loss. (iii) Calculate the loss of consumer and producer surplus and show that it is less than the sum of the gain in tax revenue and the external cost saving. b) Positive externality (5 marks). Good B is an electric vehicle which provides an external benefit of $3 per unit. (i) In the Good B diagram below draw the social marginal benefit curve and indicate the efficient level of output and the deadweight loss associated with the competitive equilibrium. (ii) Show how a $3.00 subsidy can eliminate the deadweight loss. (iii) Calculate the sum of the gain in consumer and producer surplus and external benefit and show that it will exceed the cost of the subsidy. P 8 Good A P Good B - - - -7- UI 4 2 2 8 10 12 14 10 12 14 Use the following data to answer part c) and d). There are 4 firms who are each emitting 200 units of pollution. The per unit pollution abatement costs are $100, $200, $300 and $400 for firms 1,2,3 and 4 respectively. c) Carbon tax (5 marks). (i) Explain the level of the carbon tax needed to reduce pollution by 600 units. (ii) Explain which firms will pay the tax and which ones will reduce pollution. (iii) Calculate the abatement cost associated with the pollution reduction and determine whether the abatement cost been minimized. d) Tradeable permits (5 marks). (i) How many tradeable permits must be issued in order to reduce pollution by 600 units? (ii) If each firm is given the same number of permits then explain which firms will buy permits, which ones will sell permits and at what prices. (iii) Calculate the abatement cost associated with the pollution reduction and determine whether the abatement cost been minimized