ECON of Environmental Protection

3. Suppose that there are 2,000 units of a non-renewable resource available over two 

 periods. Demand in each period is given by P = 4,000 – Q. Marginal Cost is a 

 constant $200 in each period. The discount rate is 10 percent. 

 a. What is the dynamically efficient allocation of the 2,000 units of the 

 resource, and what will be the price of the resource in each period? 

 b. Suppose that the basic setup of the problem remains the same, except that 

 now the discount rate rises to 25 percent. Re-compute the dynamically 

 efficient allocation of the 2,000 units of the resource including the price 

 each period. 

 c. On one graph illustrate your answers to parts (a) and (b). 

 d. On your graph from part (c) show the marginal user cost of the resource 

 explaining what this means and why it differs as the discount rate changes. 

 

4. The marginal abatement cost curves for two air pollutant sources affecting a 

single receptor are: MAC1 = $0.3A1 and MAC2 = $0.5A2. Their respective 

transfer coefficients are a1 = 1.5 and a2 = 1. With no control they would emit 20 

units of emissions each. The ambient standard at the receptor is 12 ppm. 

 a. If we were simply trying to reduce emissions to 12ppm combined, what 

 would be the cost effective abatement levels for each firm and what would 

 be the efficient tax/MAC/permit price? 

 b. If an ambient permit system (1 permits = rights to impact the ambient 

 quality at the receptor by 1 ppm) were established, what would be the 

 equilibrium permit price and how much abatement would each firm do?