Question

I. The demand curve for chocolate can be represented by P = 1,500-10Q, where P is the price per ton (in U.S. dollars), and Q is expressed in tons per year. The private marginal cost of production in the chocolate industry is given by 20Q. But chocolate production causes a nauseating odor to sweep over the city in the vicinity of chocolate factories, so the social marginal cost of production, taking the odor into account, is 30Q a. (3 points) Assuming that the market for chocolate is competitive, what will be the outcome (including the quantity of chocolate produced), in the absence of any policies or actions designed to deal with the externality? Please include a graph. b. (5 points) Regulators have decided to set up a cap-and-trade system for chocolate production. How many permits should they issue (that is, how much chocolate should they allow to be produced) to maximize efficiency? How much will a permit (to produce one ton of chocolate per year) trade for? c. (5 points) This odor problem and the subsequent reduction of the odor via a cap-and- trade system takes place in Grimyville. People were always free to move into or out of Grimyville. Following the reduction of the odor via the cap-and-trade system, who are the likely "winners" and "losers" from the cap-and-trade policy reform, in the resulting long- run competitive equilibrium? Please explain your answer

Answer 1