Question

Supply Demand

MC = P = 20 + 0.5Q MB = P = 200 – Q

6. Suppose the government observes the market described above and passes a rule that production in the industry cannot exceed 100 units. This would be an example of what type of policy approach?

7. Suppose instead the government decided to charge an emissions fee of $20. Why might policymakers prefer a fee over a simple decree that production cannot exceed 100 units?

8. Suppose the government decided to charge an emissions fee of $20. As firms adjust their behavior in response to this fee, will outcomes be socially optimal?

Answer 1

6. This is the example of regulation policy approach as government is regulating or cutting down the production.

7. Policymaker prefer fee because these fees motivate polluters to do what is perceived to be in the public interest which can never possible by cutting down the production.Pollution fees involve the payment of a charge per unit of a pollution emitted.When a polluter must pay for every unit of pollution emitted,it becomes in the polluter's interest to reduce emissions.

8. Yes the outcome would be socially optimal is because firm chooses to operate where the marginal savings from emitting one more unit of pollution is equal to the price of pollution.

P = - MC(X) = MS(X)

Where, X is the unit of pollution

MC(X) is marginal cost of reducing pollution by one unit

MS(X) is the marginal saving from emitting one more unit of pollution

Equation also tells that when faced with an emission fee,firms will abate pollution up to the point where the marginal cost of abatement is equal to the emission fee.This point is where the firm's total cost are lowest.