Question

Problem 1
What is the difference between cost effectiveness and efficiency?
Problem 2
Assume that the market demand curve for diamonds is given by the following equation:
PD = 1000 ? 2 QE,
and the market supply curve, which is equal to the aggregated marginal cost curve of all producers, is given by,
PS = 200 + 2 QU
Diamond production, however, is associated with harmful side effects on both workers and nearby households and firms. The total damage to the surroundings is proportional to output according to:
D = 50 Q
a. Without any government interference into diamond production, what is the market price of diamonds? What is the equilibrium quantity consumed and produced? Assume that prices are expressed in US $ per unit of diamonds.
b. What is the marginal social cost of diamond production at the equilibrium quantity?
Problem 3
Two polluting firms can control emissions of a pollutant by incurring the following marginal abatement costs: MAC1 = $300A1, and MAC2 = $100A2 where A1, and A2 are the amount of emissions abated (i.e., pollution controlled) by firm 1 and firm 2 respectively. Assume that with no abatement of emissions at all, firm 1 would release 15 units of pollution and firm 2 would release 10 units, for a total of 25 units. Assume the target level of abatement is 12 units. We do not know if this is the socially efficient level or not.
Compute the level of emissions per firm that is cost effective for society?
Problem 4
The government of Cristal Clean Village has been concerned by the toxic air pollution risk in the village and initiated a new policy campaign called “Clean Air Better Lives”. Two green energy companies in the village, Air Hunter Ltd and Cristal Air Ltd, proposed projects that can potentially deliver the objective of the campaign. The projects’ benefit and cost streams are computed as follows. The discount rate for the projects is 10%.

Answer 1