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Part III. Weitzman model, revisited This problem updates and improves the setup for the second half of the problems related to the Weitzman model from
Part III. Weitzman model, revisited This problem updates and improves the setup for the second half of the problems related to the Weitzman model from problem set 3. A town council is deciding how to improve the quality of its drinking water by regulating upstream pollution. It is debating using a price mechanism or a quantity mechanism. Assume that the value of abating a pollutant is equal to MB=422q, where q represents units of abatement. The cost of abatement is uncertain. There is a 1/3 chance that MC=q and 2/3 chance that MC=q+9. 15. If the town uses a price instrument (i.e., offers the water ltration company a subsidy per unit of abatement), what price should it set? (1 point) Note that the expected value of MC is the weighted average of the two marginal cost curves, which is E[MC]=q+6. Answer: |:| 16. If the town uses a quantity instrument (i.e., mandates a given quantity of abatement and then pays the rm its true cost), what quantity of abatement should it choose? (1 point)
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