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Let E represent global emissions of CO2 from fossil fuel burning and cement Suppose that the marginal private surplus from emissions (the private surplus from each additional small unit of emissions) is described by the following function where E is the argument. (E 864-24*E The marginal external cost (the cost of an additional small unit of emissions) to the third parties is described by the following function. McEtemal(E) - 216 Units for MSrivae and MCEteal are S/t CO2 (where t represents a metric tonne) and units for emissions are Gty where Gt represents metric gigatonnes (billions of tonnes) and 1 tonne 1000 kg

a) Plot and label the marginal private surplus and the marginal external cost on a graph with emissions in Gt/y on the x-axis and S/t CO2 on the y-axis. b) If private parties are selfish or ignorant of global warming damages such that they are unconcerned about damages to third parties, they will add emissions as long as the marginal private surplus is positive. How many emissions will they add? Hint: Set MPS 0 and solve for E. Call this level of emissions EBAU where BAU represents business as usual and label on your graph on the x-axis c) At the BAU level of emissions, calculate: i) total external costs (area under the marginal external cost curve from E-0 to EAQ) ii) total private surplus (area under the marginal private surplus curve from E-0 to EbA) iii) total social surplus (total private surplus - total external costs) Label these on your graph using letters like A, B, C, D to represent areas and colour them in d) Find the socially efficient level of emissions by setting MC this E e) If the world abates (reduces emissions) from EBAU to ESE, find the following and label on your graph. i) total external costs saved ii) total private surplus forgone iii) total social surplus gained f) Find the marginal tax on emissions that would induce the world to abate from Eb to E. Find the total tax collected and label on your graph. * Note: the MsPrvate forgone also called the marginal abatement costs (MAC) as it is the amount the private parties forgo by abating each unit of emissions while the marginal external cost is also called the marginal damages. BAU BAU cExtermal - MsPrivate and solving for E and call TSE BAU

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Answer #1

The pollution causes loss to the society in terms of global warming and decreases social surplus.

a)

The private surplus and the external cost of CO2 emission is given in the figure below

1000 800 600 O500 MS/MAC ani 216 100 SE MD/MEC BAU 25 27 30 3536 0 10 15 20 Emission (Gt/y)

aworam thm u* b he Pa* pm vate pares Thanafore ot Privale MS 2 e) cr, The total exter nal cost 2 cost Toal Private External 864-29 E 216 e (36-2) x 216 1944 biui on fi^egne surpw gained :(C+D-С (iii) Total socia 4) Tha Aax vale veau e emission from臧EBAV4otte.

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