What quantities and prices solve dynamic efficiency problem

Reference no: EM13696796

Consider the following two-period extraction problem (assuming a zero discount rate): Supply (marginal cost of extraction) in each year: MC1 = MC2 = 5 Demand each year: MB1 = 15 - Q1 MB2 = 15 - Q2 Total supply of the resource: 12

1) What quantities and prices solve the dynamic efficiency problem, considering both time periods?

2) Suppose government adds a tax of $10 for each unit of the resource produced, starting in time period 2. Solve for the new prices and quantities in each time period.

3) Explain in a sentence why this is an example of the green paradox.

4) By how much does the tax policy reduce the scarcity rent (also called “marginal user cost”)?

Reference no: EM13696796

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