A country plagued by acid rain is attempting to control their SO2 emissions. Each additional unit of emissions contributes the same measure of damages, where MD = 40. The country is subject to MAC = 5A. The appropriate level of Pigouvian tax is 40 $t/ton. Suppose the country discovered a new technology that reduced the costs of abatement to MAC' = 4A. The appropriate level of Pigouvian tax now is 40 $t/ton.

A. Now suppose the country decided to regulate this using a cap and trade system instead. Compute the cap required to result in the same permit price as the Pigouvian tax level under MAC' = 4A. Assume that firms in the country would produce 100 units of emissions total in the absence of regulation.

B. Draw a figure capturing the problems above. Make sure to include labeled axes, the MD, the two MACs, and labeled horizontal and vertical lines for the two Pigouvian taxes and the cap level.

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Answer and explanations a Pigouvian tax40ton b Pigouvian tax40ton c cap required is 10 uni... View the full answer