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) Suppose the government wanted to regulate this market using a price-based instrument.<br />
What is the efficient level of a tax on emissions?<br />
MED(2,000) = 10 + 0.0075(2,000) = $25/ton<br />
MEB(2,000) = 125 – 0.05(2,000) = $25/ton (good, our answers check out).<br />
c) What if the government wanted to regulate this market using a quantity-based<br />
instrument? What is the appropriate level of an emission cap?<br />
2,000x10 6 tons per year<br />
d) What is the efficiency difference between a price-based and quantity-based approach?<br />
(ignore any government revenue issues you may be tempted to include here.)<br />
There is no difference. Both approaches would result in the same outcome.<br />
Now suppose that after the regulation was implemented, we discover, through further<br />
market analysis, that the true MEB to the industry is 110 – 0.05E.<br />
e) What is the true efficient level of emissions in this market?<br />
MED = MEBt<br />
10+0.0075 = 110 – 0.05E => Et* = 1,739.13x10 6 tons per year<br />
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