Question

e w E R ullo -shite zxc vel 3) This exercise will explore an externality. (40 pts) Passenger vehicles in the City of Berwick emit particulate matter (PM) pollution that has an adverse effect on residents. The local university has determined that the marginal social cost of the PM pollution is: MSC = $20,000* And the marginal social benefit of pollution is: MSB = $510,000 - $30,000*Q Where Q = tons of PM emitted. a) What types of factors might these costs and benefits represent? In other words, what are the costs to society of the pollution? What are the benefits to society of polluting (or, what would the cost to society be to reduce pollution?) (6 pts) b) Create a graph showing the marginal social cost and the marginal social benefit of PM pollution (with costs on the y-axis and quantity of pollution on the x-axis). Include a range of quantities from 0 to 20 tons. (6 pts) In an unregulated market, how much pollution will be emitted? Assume that all of the marginal social costs are external costs. (4 pts) d) What is the socially optimal level of PM pollution? At the optimal level of pollution, what is the marginal social cost of pollution? (4 pts) Does the Coase Theorem offer a solution to this problem? Why or why not? (5 pts) f) If the City implemented a tax on PM emissions, what would the optimal tax be? How much tax revenue would the city generate? (8 pts) XP If the City implemented an emissions permit system, how many permits should the issue? If the permits were auctioned off, what would the market price of a permit be? pts)

Answer 1