8300 .II "F l EEP 1/ ECON C3 Introduction to Environmental Economics and Policy Assignment 2 Due: Monday 11/6 at 11:59pm [58 points total] INSTRUCTIONS: The assignment must be submitted via Gradescope' You may complete the assignment digitally or you may record your responses on papei: Upon submission, you will be required to identify what portions of your submission correspond to each part of the assignments It may take a few minutes to complete submission on Gradescope, so reserve some time for this. You may work with up to three (3) other students, You must record your name and their names on your submission' You must submit your own, original assignment, regardless of whether you collaborate with other students, To do otherwise is considered cheating, You must show your work to get credit. The more work you show, the more partial credit can be awarded, YOUR NAME (LAST, FIRST): GROUP MEMBER 1 NAME (LAST, FIRST): GROUP MEMBER 2 NAME (LAST, FIRST): GROUP MEMBER 3 NAME (LAST, FIRST): "ASSIGNMENT BEGINS ON FOLLOWING PAGE\" EEP 1/ ECON C3 2023 Assignment 2 PROBLEM 1: [24 points] The supply of paper is described by the following equation: Q; = 4.000P. where Q; is pallets of paper supplied per year, and P is the price per pallet. The demand is described by: 00 = 400,000 1,000P. where QB is pallets of paper demanded per year. (Note: These are not inverse supply and demand equations). Because of the pollution associated with paper production. marginal external costs of 520 are associated with each pallet of paper. a) [4 points] Assuming that paper is sold in a competitive market. what is the market price? How many pallets of paper will be produced per year at that price? 8 3ad3.53-us-west-2.amazonaws.com C o m 8300 .II '3' 20f3 EEP 1/ ECON C3 2023 Assignment 2 PROBLEM 1: [24 points] The supply of paper is described by the following equation: 0; = 4,000P. where Q: is pallets of paper supplied per year, and P is the price per pallet. The demand is described by: 00 = 400,000 - 1,000P, where 0,, is pallets of paper demanded per year, (Note: These are not inverse supply and demand equations) Because of the pollution associated with paper production, marginal external costs of $20 are associated with each pallet of paper, a) [4 points] Assuming that paper is sold in a competitive market, what is the market price? How many pallets of paper will be produced per year at that price? b) [4 points] What is the socially optimal (efcient) annual output of paper and what is the price at the social optimum? c) [4 points] What is the deadweight loss in an unregulated market? d) [4 points] What is the magnitude of the optimal corrective (Pigouvian) tax? Explain how a corrective tax can achieve efciency, or cost-effectiveness? e) [8 points] Sketch the market for paper, Your sketch does not need to be drawn to scale' But label your axes, demand, supply, draw and label the marginal external cost, draw and label the social marginal cost curve and indicate the magnitude of the efficient tax, PROBLEM 2: [34 points] Suppose two rms, A and B, have demand for pollution (or marginal benets of pollution) as represented by their inverse demand (for pollution) functions: F = 120 - (1,4 and 120 - 2qg, respectively Suppose the marginal damage (or marginal cost) of pollution to surrounding communities is equal to 1/30, where Q = (7,4 + (13. Hence, the marginal damage is a function of the sum of pollution emitted by each firm. a) [4 points] What level of pollution is caused by the rms if property rights to pollution (or clean air) are not well dened and factories enjoy the natural allocation to pollute as much as they wish? b) [4 points] What is the socially optimal level of pollution? (Hint: the optimal pollution for each rm is a function of the other rm's pollution because the marginal costs are a function of both rms' pollution You will have two equations and two "unknowns" to solve') EEP 1/ ECON C3 2023 Assignment 2 c) [6 points] A uniform pollution standard is a limit on pollution that is equal, i.e., uniform, for each rm If the government imposes a uniform standard on pollution, allocating to each firm an equal share of the socially optimal level of pollution, then what are the total benets to each rm of their pollution allocations? What are the total costs of pollution? And what are the total net benets (or surplus)? d) [4 points] If the government implements an optimal Pigouvian tax on pollution, then what is the magnitude of the tax? Explain in two sentences or less e) [8 points] Given the tax dened by (d), then what quantity of pollution does each rm emit, and what is total pollution? Recalling that government revenues constitute benets in a market, idea, a reallocation of surplus from consumers and producers to the government, then what are the total net benets (or surplus) in the pollution market? How does this compare to the total net benets from part (c). Interpret this result f) [8 points] If the government allowed firms to trade their uniform pollution rights from part (cit then how much would each rm oollute? Who would buy permits and who 8 igradescopeuploads.53-uswest2.amazonawscom 8:00 54 d) [4 points] What is the magnitude of the optimal corrective (Pigouvian) tax? Explain how a corrective tax can achieve efficiency, or cost-effectiveness? 3 of 3 pints] Sketch the market for paper. Your sketch does not need to be drawn to scale. label your axes, demand, supply, draw and label the marginal external cost, draw and label the social marginal cost curve and indicate the magnitude of the efficient tax. PROBLEM 2: [34 points] Suppose two firms, A and B, have demand for pollution (or marginal benefits of pollution) as represented by their inverse demand (for pollution) functions: P = 120 - q4 and 120 - 2qB, respectively. Suppose the marginal damage (or marginal cost) of pollution to surrounding communities is equal to 1/30, where Q = qA + qB. Hence, the marginal damage is a function of the sum of pollution emitted by each firm. a) [4 points] What level of pollution is caused by the firms if property rights to pollution (or clean air) are not well defined and factories enjoy the natural allocation to pollute as much as they wish? b) [4 points] What is the socially optimal level of pollution? (Hint: the optimal pollution for each firm is a function of the other firm's pollution because the marginal costs are a function of both firms' pollution. You will have two equations and two "unknowns" to solve.) 2 EEP 1 / ECON C3 2023 Assignment 2 c) [6 points] A uniform pollution standard is a limit on pollution that is equal, i.e., uniform, for each firm. If the government imposes a uniform standard on pollution, allocating to each firm an equal share of the socially optimal level of pollution, then what are the total benefits to each firm of their pollution allocations? What are the total costs of pollution? And what are the total net benefits (or surplus)? d) [4 points] If the government implements an optimal Pigouvian tax on pollution, then what is the magnitude of the tax? Explain in two sentences or less. e) [8 points] Given the tax defined by (d), then what quantity of pollution does each firm emit, and what is total pollution? Recalling that government revenues constitute benefits in a market, i.e., a reallocation of surplus from consumers and producers to the government, then what are the total net benefits (or surplus) in the pollution market? How does this compare to the total net benefits from part (c). Interpret this result. f) [8 points] If the government allowed firms to trade their uniform pollution rights from part (c), then how much would each firm pollute? Who would buy permits and who would sell permits? What would be total net benefits in the pollution market? Compare your answer to your total net benefits calculations in (c) and (e) and explain the result. w n-gradescope-uploads.s3-us-west-2.amazonaws.com