MACROECONOMICS >C< W/MYECONLAB
18th Edition
ISBN: 9781323886038
Author: Pearson
Publisher: Pearson Custom Publishing
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Chapter 21, Problem 2.5P
To determine
The role of energy use tax on power consumption.
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Imagine a firm with a marginal abatement cost (MAC) function equal to:
MAC = 32 - 4E.
The government offers a $8 per-unit subsidy for abatement. In principle, the firm could ignore the subsidy and continue to emit as many emissions as it was in the absence of government intervention, but there is money to be made from cutting back its emissions. Compared to ignoring the subsidy, how much money could a cost-minimizing firm save or make by cutting back its emissions?
(Hint: remember that firms trade off the benefits of the subsidy with the costs of abatement when deciding how much to abate)
Answer:
Graphically analyze the effect that a revenue neutral carbon tax has on the consumption of carbon intensive goods.
A river is being used by both a chemical factory for waste disposal and a salmon fishery for fish
reproduction. Waste emissions from the factory detrimentally affect fish reproduction at the
downstream salmon fishery. The chemical factory's emission levels are currently unregulated.
The marginal damage caused to the salmon fishery is given by MD=4e, where e is the level of
emissions discharged into the river per month by the chemical factory. To reduce its emissions,
the chemical factory would face marginal abatement costs of MAC=800-16e.
Suppose that instead of a constant tax of $T per unit of emissions, the government enacts a two-
rate tax system, where the higher rate (call it TH) is designed to achieve the efficient level of
emissions, and the lower rate (call it T1) is designed to collect just enough tax revenues to cover
the damages from remaining emissions.
23. At what amount per unit should the government set for the higher rate? $
24. At what amount per unit should the…
Chapter 21 Solutions
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- Portland is trying to reduce annual NOx emissions by 200 units. Its environmental planners are now deciding how to allocate the abatement mandate between cars and power plants. The marginal costs of abatement from cars (Qc) and abatement from plants (Qp) are MACC = 3Qc and MACP = Qp. Each source is currently emitting 200 units (so total emission from both sources are 400). (Note: Q is the quantity of abatement and the goal is to abate a total of 200 units). %3D (a) On your work sheet Graph the two marginal cost lines (on two separate graphs). (b) The traditional approach has been to assign all 200 units of abatement to the power plants, i.e. Qc = 0 and Qp = 200. What is the total cost of abatement under this system? Show your calculations on your work sheet and enter the total cost in the blank below. (c) The planners have hired you to tell them what the cheapest way is for the city to divide the 200 units of abatement between the two sources. What do you tell them? (ie. what are Qc"…arrow_forwardWith rental rates exceeding $3,000 per square foot per year, retail space in Causeway Bay, Hong Kong, is among the world's most expensive. In 2011, the Town Planning Board limited the height of future buildings in the area to between 130 and 200 meters. Real estate developer Hysan Group, which owns nine properties in the area, asked the Board to relax the limits, but the Board denied the application. What externality does the height restriction resolve? How would the Hysan Group benefit from relaxing the height restrictions? Should the restrictions on height be the same throughout Hong Kong?arrow_forwardFollowing are the marginal abatement costs of three firms . Suppose each firm is currently emitting 10 tons / week , so the total emissions are 30 tons / week . Suppose we wish to reduce total emissions by 50 % , to 15 tons per week . The following table provides marginal abatement costs for each firm . a ) What is the total cost if each firm cuts total emission by 50 % from their current levels . b ) What is the total cost if the total emissions decrease by 50 % ( to 15 tons per week ) that meets the equi - marginal principle . c ) From the society's point , which method of reducing ( a or b above ) emissions is better ? Provide a reason .arrow_forward
- why do public utlities like the electric company tend to experience economies of scale at all output levels?arrow_forwardWithin the remote nation of New Hope, total industrial production is currently creating a constant level of GDP that results in 2,600 million tonnes per year of carbon being released into the atmosphere. The government announced three years ago that a cap on carbon emissions of 2,430 million tonnes would be imposed. This triggered the creation of new firms that began to plant large plantations of trees grown specifically to absorb carbon from the atmosphere and thus earn carbon credits that they would sell to the highest bidder. See table below for the supply of these earned carbon credits available when the program begins. Quantity of Credits Price of Carbon Credits Created $ 1,125 40 1,225 70 1,325 100 1,425 140 1,525 170 1,625 200 1,725 230 a. What will be the initial price for carbon credits? Initial price $ Next, assume that new technology enables the same level of GDP to be achieved with 5 percent less carbon emissions. b. Now what is the price of carbon credits? Price $arrow_forwardA couple of years ago, a global carbon tax seemed far from becoming a reality. However, the introduction of a such a tax now appears to be a possible and viable new instrument for mitigating climate change. The idea has been advocated by heads of international organizations, businesses and professional services firms (including PwC) and lobbyist for big companies (including the Business Council of Australia). Suppose that governments worldwide were to agree to implement a minimum carbon tax of 75 US dollars per tonne of C02 emissions. Further, suppose that you are the CEO of a manufacturer of affordable casual clothing. From this perspective, answer the following questions: Based on the article by Dr Alice Pirlot, explain how you would expect a global carbon tax to change the current laws and regulations that affect your business under the existing international legal framework. Suppose that your shareholders are only concerned with maximising the profits of your business, given the…arrow_forward
- Plants A and B emit 12 tons and 6 tons of carbon dioxide (CO2), respectively. MAC(marginal abatement costs) for a = 12 - Ea, MACb=12-2Eb MD(marginal damage) = 1/3*E (E indicates CO2 emission) Suppose the government decides to introduce a carbon tax on CO2 emissions. What is the tax amount (ie tax rate) per optimal ton of CO2 emissions? And what is the total revenue that would make the government sufficiently capable of introducing a carbon tax?arrow_forwardA village has five residents, each of whom has accumulated savings of $100. Each villager can use the money to buy a government bond that pays 12% interest per year or to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. information is Number of goats Price per 2-year old goat Income per goat 1 130 30 2 125 25 3 120 20 4 115 15 5 105 5 Refer to the table above in Q10. Suppose a village elder decides the total number of goats and bonds with the goal of maximizing total village income. The village income will be ___. Answer: 586arrow_forwardU.S. route 83 passes through the village of Burr Ridge, IL. The engineers of the Transportation Department have proposed constructing a new highway through existing farmland to bypass the city for use by through traffic. The new bypass would however entail an initial construction cost of $40 million and an average annual maintenance cost of $50,000. a) List all major positive impacts that this project could have on the downtown area. b) What are the major negative impacts that this project could have on the downtown area? c) List all major positive impacts that this project could have on the areas near the proposed bypass. d) List all major negative impacts that this project could have on the areas near the proposed bypass.arrow_forward
- Suppose that Penn Products and Teller Industries are both emitting 30 metric tons of perfluorocarbons (PFCs) into the atmosphere. Regulators wish to reduce emissions to 40 metric tons overall, and plan to achieve this with a system of tradable permits. Penn’s marginal abatement costs are given by MACP = 5eP, where eP is the number of metric tons of emissions that Penn is cutting. Thus, the cost of cleaning up the first metric ton is $5, the second ton costs $10 to clean up, and so on. Teller’s marginal abatement costs are given by MACT = 7.5eT, where eT is the number of metric tons of emissions that Teller cuts. a. The lowest-cost way to reduce emissions is found when both firms’ marginal abatement costs are equalized. Equate Penn’s and Teller’s marginal abatement costs, and solve for eP in terms of eT. For each metric ton that Teller cuts, how many tons should Penn cut? b. Because 20 metric tons are to be cut, we know that eP + eT = 20. Use your…arrow_forwardCompare placing a tax on gasoline to a mandated increase in the average fuel efficiency of each car in terms of reducing the usage of gasoline, reducing greenhouse gases, and also providing consumers with choice in their vehicle selection. Analyze the impact on consumers, service stations, and car manufacturers.arrow_forwardConsider the following model of a hypothetical market for MSW management services: MPB = 25 − 2Q MPC = 4 + Q MEC = 0.5Q, where Q is the number of trash containers per household per month. A. Quantitatively determine the effect of the resource misallocation due to: the presence of the negative externality, and the use of a flat fee pricing system in the presence of a negative externality. B. Determine the dollar value of a waste-end charge that would restore efficiency to this market. Explain your answer intuitively.arrow_forward
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