Question

Inefficient Environmental Policy Consider a city where each polluting firm initially generates two tons of pollution. Half the polluters (type L} could cut Pack pollution at a cost of $4 per ton, and the other half (type H) could cut Pack at a cost of $30 per ton. The city is considering two alternative environmental policies: i. Pollution tax: Each firm would pay a tax of $5 for each unit of pollution. ii. Uniform-reduction: Each firm would Pe required to cut its pollution in half, to one ton. a. The tax policy is [more, less] efficient than the uniform-reduction policy Pecause.... b. The pollution tax causes a [smaller, larger] shift of the city's labor-demand curve because... c. The city is more likely to experience an increase in total employment under the policy because.... d. Illustrate with two graphs, one for each policy.

Answer 1

1. Tax policy is (more) efficient than the uniform-reduction policy because firm (H) does all the abatement at a cost $4+$4 = $8 rather than splitting the abatement between the two firms at a cost = $30+$4=$34
2. The pollution tax causes a smaller shift of the city’s labor demand curve because it increases population costs by a smaller amount.
3. The city is more likely to experience an increase in total employment under the tax policy because it decreases labor demand by a smaller amount
4. The tax policy has a smaller leftward shift of the labor demand curve, and thus a larger quantity of labor.