Question C1: Coal and carbon (25 Marks) Consider a hypothetical country in which most electricity is generated with domestically sourced coal. Assume that it is not cost-effective to import coal. However, this form of electricity generation results in sulphur and carbon emissions. The consequences are negative externalities relating to health of people living in the country, and to climate change respectively. Currently 700 units of coal are being used, but the government wishes to reduce this to 600. a) One possible policy response is to pay some coal mines to suspend production. What would happen if the government paid for 100 not to be mined (100 that would have been mined and used otherwise)? Illustrate in a supply and demand diagram for the coal market. b) Do you think that this policy would be effective at reducing coal usage to 600? Why or why not? c) An alternative approach is to require permits to mine coal, restrict the number of permits, and allow firms to trade permits. Illustrate the impact of this policy in a supply and demand diagram. d) If the two policies (discussed in (a) and (b)) resulted in the same amount by which coal use declined, which of them do you think would be preferable? Explain. e) A third policy might be dual cap-and-trade schemes for permits to emit sulphur and to emit carbon, rather than permits to mine coal. Would this approach have any advantages or disadvantages over the the policies addressed in questions (a) to (c)? Explain