Question

Problem 1 In the city of Macondo each auto shop initially generates two tons of waste (i.e., pollution). Half the auto shops (type L) could cut back pollution at a cost of $40 per ton, and the other half (type H) could cut back at a cost of $300 per ton. The city is considering two alternative environ- mental policies:

Pollution tax: each firm pays a tax of $50 per ton of pollution

Uniform-reduction: each firm would be required to cut its pollution in half, to one ton

Answer the questions below:

The tax policy is [more, less] efficient than the uniform-reduction policy, because (...)

The pollution tax causes a [smaller, larger] shift of the city’s labor- demand curve because (. . . )

The city is more likely to experience an increase in total employment under the [1st, 2nd] policy, because (. . . )

Answer 1

Uniform reduction policy is not so strict as tax policy because tax policy requires each firm to pay a tax so that firm will be more cautious before creating any kind of pollution. Nobody wants a loss .

Due to Pollution tax the firm needs to pay tax against pollution hence increase in number of labourers can decrease the burden of paying tax. Because each labourer can contribute for the tax. Hence there will be smaller or larger shift in labour demand.

Since there is increase in labourer employed by the firm, there will be rightwards shift of the demand curve. Under the second policy when the number of laborers employed increases then only new techniques can be made by the laborers to reduce the pollution.