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In: Economics

Exercise 9.3 Suppose that pollution in a neighborhood comes from two factories, with marginal benefi t...

Exercise 9.3 Suppose that pollution in a neighborhood comes from two factories, with marginal benefi t curves given by MB1 = 12 – P1 and MB2 = 8 – P2 . The level of pollution in the neighborhood is given by P = P1 + P2 . The government wants to limit pollution by instituting a pollution-rights market. The government ’ s desired level of P is 10, so it prints 10 pol-lution rights and offers them for sale to the fi rms.

(a) Find the equilibrium selling price of a pollution right, as well as the allocation of rights (and hence pollution levels) across the two factories.

(b) Repeat (a) for the case in which the government ’ s desired level of pollution equals 14.

(c) Comment on the usefulness of a pollution rights market in achiev-ing effi cient levels of pollution abatement.

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