Question

4. Suppose the US is considering undertaking a cooperative agreement with two other countries to reduce greenhouse gas emissions (e)-Europe (E), which is treated here as a single country, and Japan () The marginal costs and benefits of greenhouse gas emissions are described in the following table. MB, refers to the marginal benefit to country i from emissions ei, and MCy refers to the damage imposed by each unit of emissions produced by country i on country J: 1 J refers to the damages a country inflicts on itself by emitting a unit of greenhouse gases Country Marginal Marginal Cost US trope Benefit | MB15-60-e MCusUS 20 MCSE 10 MCSJ-10 MCEUS 20 MCEE 10 MC 10 MCUS 20 MCJE 10 MCW 10 (a) If each country acts unilaterally to maximize its own welfare, what level of emissions will it choose? What is the benefit to each country associated with its own unilateral action relative to no abatement? How much do Europe and Japan benefit from the US unilateral emissions policy? B) If all three countries act to maximize their combined welfare, what levels of emissions will be chosen? Relative to the case where all countries pursue unilateral policies, what is the additional gairn to each region from the policy coordination? Why does the US gain more from coordination than the other two countries? (o Suppose that Europe and lJapan cooperate but that the US fre-rides (i.e. pursues the unlateral policy). Assuming no retaliation by the other countries (and ignoring the costs in political "good will") what is the gain to the US from free riding relative to the gain from cooperating with the other countries? (d) Suppose Europe and the US cooperate and Japan free-rides. Assuming no retaliation by the other countries (and ignoring the costs in political "good will"), what is the gain to Japan from free-riding relative to the gain from cooperating with the other countries? What side-payment would be required to ensure Japan's cooperation? Would the US alone be willing to make this side-payment? How might the temptation to free-ride be related to the size of a country? (e) Suppose Europe, Japan. and the US agree to cooperate. However, the US decides to "shirk"from the agreement and fails to enforce emissions reductions without informing lapan and Europe, who think everyone is committing to the policy. How much would Japan and Europe be willing to pay for enforcement of US commitment to the treaty (i.e. how much would Japan and Europe collectively be willing to pay for the guarantee of US participation?) If Europe and Japan know before a treaty is signed that the US would require enforcement, what type of deal would result?

Answer 1

Answer:

For US_US, E^- MC = 10, for Europe MC_E, E = 10 and for Japan MC_J, E = 10 c) US will chose the MC_US, E = 10, MC_E, E = 10 and MC_J, E = 10 to be benefited e) the payment should be equally bared by both Japan and Europe for the unperformance of US in the group.