## [solution]: A real estate investor has the opportunity to purchase land

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this is my economics homework assignment, is about economics and environment

EC 450

Problem Set #3

Due February 29, 2016

1. Suppose that there are two ?rms. The marginal savings from emissions for ?rm #1 is given by

M S1 (e1 ) =

15 ? 3e1

0

0 ? e1 ? 5

e1 &gt; 5.

(1)

0 ? e1 ? 10

e1 &gt; 10.

(2)

The marginal savings from emissions for ?rm #2 is given by

M S2 (e2 ) =

10 ? e2

0

(a) Absent any regulation, how much would each ?rm choose to emit?

(b) Suppose that the government decided that they wanted total emissions reduced to 5 units of pollution.

If they chose to do so using a tradeable emissions permit system, how many permits should they issue?

(c) Suppose that the government gave all of the permits initially to ?rm #1. After trading, how many

permits would each ?rm hold and what would be the permit price?

(d) Suppose, instead, the government gave all of the permits to initially to ?rm #2. After trading, how

many permits would each ?rm hold and what would be the permit price?

(e) Finally, suppose the government initially gave half of the permits to each ?rm. After trading, how many

permits would each ?rm hold and what would be the permit price?

2. Suppose now that there was a transactions cost associated with buying a permit. In particular, suppose that

buying a permit incurred a transactions cost of s = 1 (in addition to the price of the permit itself).

(a) Suppose that the government gave all of the permits initially to ?rm #1. After trading, how many

permits would each ?rm hold and what would be the permit price?

(b) Suppose, instead, the government gave all of the permits to initially to ?rm #2. After trading, how

many permits would each ?rm hold and what would be the permit price?

(c) Finally, suppose the government initially gave half of the permits to each ?rm. After trading, how many

permits would each ?rm hold and what would be the permit price?

3. Rather than using a tradeable permit system, suppose that the government decided to use an emissions tax.

What tax rate should they set to achieve their objective?

1

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