. Green subsidies In the lecture, I asserted that green subsidies were less efficient than Pigouvian taxes because, even though they can shift market shares between relatively clean and relatively dirty goods, they will get the average price of the goods wrong. If a good (like an electric car) has a negative externality, we cannot mimic a Pigouvian tax by subsidizing it (except in special extreme cases). There are two goods, E for efficient and I for inefficient. They are substitutes for each other, and the demand curves are as follows: DE = 100 ? 2PE + PI DI = 100 ? 2PI + PE Both are produced by perfectly competitive suppliers that have constant marginal costs. The marginal costs are MCE = 10 and MCI = 20. The externality associated with each good is a constant marginal externality: MEE = 5 and MEI = 10. 5. If there are no policies, what are the quantities sold of E and I? (Prices will be equal to MC.) (2 points) Answer DE: Answer DI : 6. If there are optimal Pigouvian taxes (just use the Pigouvian prescription) imposed on both products, what are the quantities sold of E and I? (Prices will be MC plus the tax.) (2 points) Answer D? E: Answer D? I : 7. Now suppose that there is no tax on I, but there is a green subsidy applied to E equal to the difference in externalities, which is 5. This might be an intuitive policy because it gives a subsidy to E for the reduction in emissions compared to each unit of I. What are the quantities sold of E and I? (2 points)

Part II. Green subsidies In the lecture, I asserted that green subsidies were less efficient than Pigouvian taxes because, even though they can shift market shares between relatively clean and relatively dirty goods, they will get the average price of the goods wrong. If a good (like an electric car) has a negative externality, we cannot mimic a Pigouvian tax by subsidizing it (except in special extreme cases). There are two goods, E for efficient and / for inefficient. They are substitutes for each other, and the demand curves are as follows: De = 100 - 2Pg + P, Dy = 100 - 2Pr + PE Both are produced by perfectly competitive suppliers that have constant marginal coats. The marginal costs are MOg = 10 and MCy = 20. The externality associated with each good is a constant marginal externality: ME= = 5 and ME = 10. 5. If there are no policies, what are the quantities sold of E and I? (Prices will be equal to MC.) (2 points) Answer DE: Answer D,: 6. If there are optimal Pigouvian taxes (just use the Pigouvian prescription) imposed on both products, what are the quantities sold of E and I? (Prices will be MC plus the tax.) (2 points) Answer DE Answer DF: 7. Now suppose that there is no tax on I, but there is a green subsidy applied to E equal to the difference in externalities, which is 5. This might be an intuitive policy because it gives a subsidy to E for the reduction in emissions compared to each unit of I. What are the quantities sold of E and I? (2 points) Answer DOS: Answer DFS