Question

Q_Aand Q_Sare the pollution levels for Arrow and Solow Industries, respectively. Profits (benefits) associated with polluting activity, p_i(i=A, S), are p_A=10Q_A– 0.5*Q_A²and p_s= 20Q_S – Q_S². Marginal benefits (profits) for each firm are MB_A=10 -Q_A, and MB_S=20 -2Q_S.

(c)  (5 points) Someone in the DEQ studied environmental economics and suggests a marketable permit system to achieve the 60% rollback, with each firm given permits representing the level of its emissions in (b). Who (if either) will want to buy permits, and who will sell? How much will each firm pollute? What will be the equilibrium permit price? What will each firm’s profits be? Use Q=4 for borth firms from previous parts of the question

(d)  (5 points) Next, someone in the DEQ suggests a pollution tax. What level of tax will achieve the desired level of pollution? How much will each firm pollute? What will each firm’s profits be?

(e)  (5 points) A third DEQ employee suggests subsidizing the pollution reduction from the initial levels identified in (a). What level of subsidy will achieve the desired level of pollution? How much will each firm pollute? What will each firm’s profits be?

(f)  (3 points) Rank the four regulatory approaches (rollback, permits, tax, subsidy) from the firms’ perspectives. Why do they have these rankings? Do they have the same rankings? Why or why not?

Answer 1