2. The US and Canada each choose how much coal to burn (x for the US,...

 

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2. The US and Canada each choose how much coal to burn (x for the US, y for Canada). Payoffs are below. For each country, the first term is the value of the power produced, and the second term reflects costs of air pollution. The last term reflects side payments: under the terms of a treaty, each country must pay the other one a "penalty" of p dollars per unit of coal burned. US: u₁(x, y) = 12x - (x + y)2 + (py - px) Canada: u₂(x, y) = 12y — (x + y)² + (px - py) a. Solve for the US's best response function x = BR₁(y). Appeal to symmetry to find Canada's best response function y = BR₂(x). Then use these conditions to find a symmetric NE. What is each country's total harm from pollution in this equilibrium? b. Determine the penalty rate p that makes welfare (defined as W = ₁ + ₂) as large as possible. In your symmetric equilibrium the payments for each country should net out to zero. Does that mean that the price p has no effect on behavior or total pollution? 2. The US and Canada each choose how much coal to burn (x for the US, y for Canada). Payoffs are below. For each country, the first term is the value of the power produced, and the second term reflects costs of air pollution. The last term reflects side payments: under the terms of a treaty, each country must pay the other one a "penalty" of p dollars per unit of coal burned. US: u₁(x, y) = 12x - (x + y)2 + (py - px) Canada: u₂(x, y) = 12y — (x + y)² + (px - py) a. Solve for the US's best response function x = BR₁(y). Appeal to symmetry to find Canada's best response function y = BR₂(x). Then use these conditions to find a symmetric NE. What is each country's total harm from pollution in this equilibrium? b. Determine the penalty rate p that makes welfare (defined as W = ₁ + ₂) as large as possible. In your symmetric equilibrium the payments for each country should net out to zero. Does that mean that the price p has no effect on behavior or total pollution?

Answer rating: 100% (QA)

Answer a BR1y122y3 BR2x122x3 xy122x3 xy4 US u44 4816032 Canada u244 4816032 W323264 b p4 US u44 4816436 Canada u244 4816416 W361652 p does not affect ... View the full answer