Consider the following supply and demand schedule for steel:

Price per tonne ($)	20	40	60	80	100	120	140	160	180
Q demanded (million tonnes)	200	180	160	140	120	100	80	60	40
Q supplied (million tonnes)	20	60	100	140	180	220	260	300	340

Pollution from steel production is estimated to create an external cost of $60 per tonne.

a) Using a supply and demand graph to support your answer, what is the unregulated market equilibrium (price and quantity) in the steel market? (20 marks)

b) Add the external costs to your graph from part a. What is the socially optimal outcome in the steel market (price and quantity)? What economic policy could be implemented to achieve the social optimum? (carefully explain how the policy you choose achieves this). (40 marks)

c) Create a new graph which incorporates your answers to parts a and b and then use welfare analysis to demonstrate and explain that social welfare is greater at the social optimum than with the unregulated market outcome. (40 marks)

Question 2:

Two power plants are currently emitting 8,000 tonnes of pollution annually each (totalling 16,000 tonnes of pollution). Pollution reduction costs for Plant 1 are given by MCC1 = 0.02Q and for Plant 2 by MCC2 = 0.03Q, where Q represents the number of tonnes of pollution reduction.

a) Suppose a regulation is implemented that requires each plant to reduce its pollution by 5,000 tonnes. What will be each firm's pollution control costs? Draw two graphs (one for each firm) to support your answer. (25 marks)

b) Suppose instead that a pollution tax of $120 per tonne of pollution emitted is implemented. How much will each firm now pay in pollution reductions costs (not considering taxes)? How do total pollution reduction costs with the tax compare to the costs calculated in part a? Explain why the costs differ. How much does each firm pay in taxes? Draw two graphs (one for each firm) to support your answer. (25 marks)

c) Finally, suppose that a tradeable permit scheme is instituted in which permits for emissions of 6,000 tonnes are freely issued, 3,000 permits to each plant. What are the pollution reduction costs to each firm without trading? Use a graph to support your answer, showing 10,000 tonnes of total pollution reduction. (25 marks)

d) Using the same diagram from part c, explain which firm will sell permits (and how many), and which firm will buy permits. Assuming all permits sell for the same price, how much will each permit cost? Calculate each firm's costs after trading, considering their pollution reduction costs and the costs (or revenues) from the permit sale. (25 marks)

Answer rating: 100% (QA)

a Using a supply and demand graph we can see that the unregulated market equilibrium for the steel market occurs at a price of 80 per tonne and a quan... View the full answer