question archive Suppose there is a paper mill which emits sulphur dioxide (SO2) emissions (E) into the atmosphere inflicting damages on a town
Suppose there is a paper mill which emits sulphur dioxide (SO2) emissions (E) into the atmosphere inflicting damages on a town
Subject:EconomicsPrice: Bought3
Suppose there is a paper mill which emits sulphur dioxide (SO2) emissions (E) into the atmosphere inflicting damages on a town. The marginal abatement cost of the paper mill is: MAC(E) = 800-E/6 The marginal damage of the town is: MD(E) = E/3 Units for E are tonnes SO2/y while value units are S/tonne SO2. a) List three external costs of sulphur dioxide (SO2 emissions). List three ways the firm could abate its emissions. b) Plot the MAC and MD on a graph (Fig. 1). Calculate the following levels of emissions (assuming no Coasian exchanges have occurred) and label on your graph. Show your work. i) "healthy environment" level ii) "business as usual" level for the paper mill. iii) socially efficient level c) Suppose that the paper mill has the property rights to pollute at the above. Assuming no transaction costs of bargaining, write down functions for the following where the argument is emissions (E). i) Town's maximum marginal willingness to pay (MWTP) the town to abate. ii) Mill's minimum marginal willingness to accept (MWTA) as compensation for abatement. d) For part c, how many emissions rights will be exchanged and which party will buy and which will sell? Compare the final post exchange allocation with the socially efficient level. e) Supposing that each of these property rights trade at the price at which the MAC equals the MD, find the total social surplus gain due to the exchange. This is also the total bargaining rent. Calculate the amount of this total bargaining rent that goes to each party. Label as areas on your graph.
