Principles of Microeconomics, California Edition
2nd Edition
ISBN: 9780393622102
Author: Dirk Mateer, Lee Coppock
Publisher: NORTON
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Chapter 7, Problem 10SP
To determine
Explain whether the proposed solution makes the builder internalize the externality.
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Within 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 $
With 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?
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"…
Chapter 7 Solutions
Principles of Microeconomics, California Edition
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