1. Hybrid Instruments and Expected Net Benefits. This problem reinforces the concepts covered in the last...

 

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1. Hybrid Instruments and Expected Net Benefits. This problem reinforces the concepts covered in the last problem set and examines what happens when we combine price and quantity instruments. Congress is interested in regulating emissions of a hazardous pollutant. Economists at the EPA have estimated the marginal costs and benefits of aggregate emission reduc- tions MB= 25-Q MC = 5+Q (a) What is the efficient level of pollution reduction? What tax would achieve this level of reductions Q? What are the total benefits and total costs to society at the efficient point? (b) It turns out that there is significant uncertainty behind EPA's cost curve estimate. In particular, they think that there's an equal chance that each of the following marginal cost curves will be realized once the policy is enacted (ie., probability = 1/3 for each): MCHIGH = 10 +Q MCEXP=5+Q MCLOW = Q Calculate the net benefits at the ex-post efficient level under each marginal cost curve. Given this uncertainty, would you recommend that congress use a price or a quantity instrument to regulate this pollutant? (c) Congress opts to use a quantity instrument with the cap set at the expected efficient level. Calculate the equilibrium permit price that the will be realized 1. Hybrid Instruments and Expected Net Benefits. This problem reinforces the concepts covered in the last problem set and examines what happens when we combine price and quantity instruments. Congress is interested in regulating emissions of a hazardous pollutant. Economists at the EPA have estimated the marginal costs and benefits of aggregate emission reduc- tions MB= 25-Q MC = 5+Q (a) What is the efficient level of pollution reduction? What tax would achieve this level of reductions Q? What are the total benefits and total costs to society at the efficient point? (b) It turns out that there is significant uncertainty behind EPA's cost curve estimate. In particular, they think that there's an equal chance that each of the following marginal cost curves will be realized once the policy is enacted (ie., probability = 1/3 for each): MCHIGH = 10 +Q MCEXP=5+Q MCLOW = Q Calculate the net benefits at the ex-post efficient level under each marginal cost curve. Given this uncertainty, would you recommend that congress use a price or a quantity instrument to regulate this pollutant? (c) Congress opts to use a quantity instrument with the cap set at the expected efficient level. Calculate the equilibrium permit price that the will be realized

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a To find the efficient level of pollution reduction we set marginal cost MC equal to marginal benef... View the full answer