Solution
David answered on
Dec 22 2021
Answer all Questions Econ of Energy and Environment 25 points
1. The Clean Air Act instituted trades between states for SO2 emissions. Several utility
companies across geographic borders have engaged in such trades in recent years.
Consider a trade between a utility in Wisconsin and the TVA in Tennessee. Assume
that the trade reduces Wisconsin electricity consumers’ bills by a total of $ 1 million,
and lowers Tennessee electricity consumers’ bills by $ 500,000. Also assume that the
trade improves local environmental quality in Wisconsin by an amount that people
value at $ 2 million. If the local environmental quality in Tennessee declines as a
esult of this trade, then indicate a potential Coase agreement that could avoid the
environmental decline and would still make the trade profitable to both parties? Is
such a trade possible in this scenario? (4 points)
Answer:
In this problem, the trade between a utility in Wisconsin and the TVA in Tennessee has
improved local environmental quality in Wisconsin by an amount that people value at $ 2 million
ut the local environmental quality in Tennessee has declined. This environmental decline can be
avoided through Coase agreement. Prof. Coase argued that the market will automatically
generate the optimal level of the externality. The famous Coase theorem states in absence of
transaction costs, an efficient outcome can be reached by negotiation between private parties.
The Coase theorem is stated below formally:
Coase theorem: If there are no transaction costs and property rights are well defined, then
voluntary transactions will eliminate any distortions in resource allocation stemming from an
externality and the outcome is independent of the property rights.
Answer all Questions Econ of Energy and Environment 25 points
In this case, let us assume that there involves no transaction cost to negotiate. Again it is
assumed that property rights are well defined – each country has the right to clean air. Tennessee
will negotiate with Wisconsin. Wisconsin will give up some of its improvement in the
environmental quality. This will improve environmental standard in Tennessee. Since both the
countries have right to clean air the negotiation will stop somewhere in the middle, i.e. and good
environmental standards,
2. Chip and Dale run separate logging companies in the same forest. Both pollute the
iver flowing through the forest with de
is from their work. In the table below, the
first row shows the cu
ent level of de
is that makes its way into the river from their
work. The following rows show how much it would cost each logger to reduce its
pollution by additional increments of 10 pounds. You are the official from the EPA
who is responsible for the reduction of this pollution. Fully describe the cost-effective
mechanism that you will design to reduce the cu
ent level of de
is by half. (4
points)
Companies Chip Dale
Cu
ent de
is in pounds 60 80
Cost of reducing de
is by 10 pounds $5 $2
Cost of reducing de
is by a second 10 pounds $10 $4
Cost of reducing de
is by a third 10 pounds $15 $6
Cost of reducing de
is by a fourth 10 pounds $20 $8
Cost of reducing de
is by a fifth 10 pounds $25 $10
Total de
is by both the companies initially = (60 + 80) = 140 pounds
Now, the objective is to reduce the total de
is by half.
Therefore de
is to be reduced by 140/2 = 70 pounds
As an official of the EPA, my objective is to reduce the de
is by half at the least cost.
Answer all Questions Econ of Energy and Environment 25 points
Now, this can be achieved by taking the 7 lowest cost of reduction of de
is by 10 pounds.
They are ($2, $4, $5, $6, $8, $10 and $10)
Therefore total cost of reduction 70 pounds = $(2+4+5+6+8+10+10) = $45
This includes 50 pounds reduction by Dale and 20 pounds by Chip
3. Four companies, Alpha, Beta, Gamma and Delta, are burning coal to produce
electricity. As a result, they also produce emissions. The first row of the table below
shows the total pounds of emissions cu
ently produced by each firm. The other rows
of the table show the cost for each firm of reducing emissions by the first 50 tons, the
second 50 tons, and so on. You are an EPA official and you want to design a cost-
effective mechanism to reduce total emissions by one third. What will be the new
levels of emissions of Alpha, Beta, Gamma and Delta under your mechanism ? (4
points)
Companies Alpha Beta Gamma Delta
Cu
ent production of...