Page 220 - The Principle of Economics

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PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR
12.
different countries but is distributed equally around the globe within a year. In an article in The Boston Globe (July 3, 1990), Martin and Kathleen Feldstein argue that the correct approach to global warming is “not to ask individual countries to stabilize their emissions of carbon dioxide at current levels,” as some have suggested. Instead, they argue that “carbon dioxide emissions should be reduced in countries where the costs are least, and the countries that bear that burden should be compensated by the rest of the world.”
a. Why is international cooperation necessary to reach an efficient outcome?
b. Is it possible to devise a compensation scheme such that all countries would be better off than under a system of uniform emission reductions? Explain.
Some people object to market-based policies to reduce pollution, claiming that they place a dollar value on cleaning our air and water. Economists reply that society implicitly places a dollar value on environmental cleanup even under command-and-control policies. Discuss why this is true.
13. (This problem is challenging.) There are three industrial firms in Happy Valley.
INITIAL
POLLUTION LEVEL
A
B80 25 C50 10
The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits.
a. Who sells permits and how many do they sell?
Who buys permits and how many do they buy? Briefly explain why the sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation?
b. How much higher would the costs of pollution reduction be if the permits could not be traded?
FIRM
COST OF REDUCING
POLLUTION BY 1 UNIT
70 units
$20