You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
d. Suppose after you have set the fee or permit in part (b) it turns out that r = 3. Show the<br />
deadweight loss from the permit and fee, assuming these instruments cannot be changed.<br />
Which instrument appears to be better?<br />
If the real r = 3, then we should be emitting at a slightly higher level of 5.12.<br />
If we used a quantity approach, then Q = 4.74 and we are under-emitting (over-abating).<br />
The DWL is caused by the fact that the MS is higher than the MED, and is equal to the<br />
triangular area bounded by the MSH on top and MED below, between 4.74 and 5.12 =><br />
DWL from permit = ½(52.16-42.57)(5.12-4.74) = $1.8221<br />
If we used a tax, then P = 42.57 and Q = 5.34. This means we are over-emitting (underabating).<br />
The deadweight loss is caused by the fact that MED is higher than MSH for the<br />
range of abatement from 5.12 to 5.34.<br />
DWL from tax = ½(5.34 -5.12)(48.06 – 42.57) = $0.6039<br />
The tax appears to have the lower DWL in this case.<br />
<strong>Problem</strong> 3<br />
<strong>Problem</strong> 6, page 343 in text<br />
Imagine that you are a manufacturer of inflatable rubber ducks. Unfortunately, the<br />
manufacture of ducks involves damaging water pollution. You have computed that your<br />
marginal savings in millions of dollars from emitting pollution is linear: MS(e) = 50 – 2e,<br />
where e is the amount of emissions in tons. The Ministry of the environment has decreed<br />
that your emissions should not exceed 5 tons.<br />
a. How much money does it cost you to obey the regulation rather than emit as much as<br />
you want?<br />
Total cost of abating to e = 5 is the shaded area below (next page).<br />
TC = ½(20*40) = $400M<br />
5
Change language