Question

Part II. Kang Corporation operates a factory that produces labor economic textbooks. The factory is located next to a river. Mr. Roh, a fisherman in the downstream area of the river, experiences damages to his fishery business due to pollution caused by the factory. Assignment 2 Public Finance S. Go Q denotes the quantity of the labor economics textbooks produced a year. The supply curve, or the private marginal costs, of the Kang Corporation is P = 3Q + 2. The marginal damages to Mr. Roh’s fishery business is increasing as more labor economics textbooks are produces, and is known as MD = 2Q. The market demand for the textbook is P = -Q + 26.

10. What is the market equilibrium quantity of the textbook?

11. What is the market equilibrium price of the textbook?

12. What is the socially optimal level of the textbook?

13. What is the socially optimal price of the textbook?

14. What should be the Pigouvian tax rate to attain the socially optimal level of the textbook production?

15. What is the total tax revenue when the socially optimal level of the textbook is attained by the Pigouvian tax?

Now suppose there is another polluter, YS Corporation. Each company faces different marginal cost to reduce pollution. Denote Xi is the amount of pollution reduced by each company i. Then the marginal costs to reduce pollution are known as follows. MCKang = 3XKang MCYS = XYS Currently each company emits 100 units of pollution per year, thus the total amount of pollution is 200. The government wants to reduce the total amount of pollution by half.

16. If the government imposes an emissions fee at a flat rate, how much should be the costeffective emissions fee rate per each unit of pollution reduced to reduce the total amount of pollution by half?

17. How much unit of pollution will be reduced by Kang Corporation with the emission fees in Q.16?

18. How much unit of pollution will be reduced by YS Corporation with the emission fees in Q.16?

19. How much is the total revenue of the emission fees raised by the government?

20. Instead, to attain the same policy goal, the government has decided to issue 100 permits, each of which allows a company to emit a unit of pollution, and granted all the permits to YS Corporation. If two companies can trade the permits each other, how many permits will YS Corporation sell to Kang Corporation?

Answer 1