Reference no: EM133376183

1. How much steel does each firm produce if there is no pollution regulation? What are the profits for each firm? What is total production
of steel and total profit in the industry (the sum of each firm's profits)?

2. What is the socially optimal quantity of steel production? What is the socially optimal quantity of pollution?

3. Suppose the local government imposes a uniform standard on pollution such that total pollution is equal to the socially optimal quantity
of pollution. How much steel does each firm produce? What are the profits for each firm? What are total production and total profits? Are
any permits unused?

4. Now suppose the local government allows the firms to trade the pollution quotas they were (freely) allocated in (c). Further, suppose the
price of permits is equal to the competitive permit market price of $90.
How much does each firm produce? What are profits for each firm and total profits?

5. Suppose instead that the local government imposes a Pigouvian tax on pollution. What is the amount of the optimal tax? How much does
each firm produce? What are profits to each firm? What is the amount of government revenue and what are total profits to the firms?

6. What is total surplus (Government Revenues + Producer Sur- plus (Profits in this problem) - Total External Cost) in (3), (4), and (5).
Compare and explain briefly. (Note that there is no consumer surplus because of the perfectly elastic demand and the upward sloping supply
curve.)

7. Extra Credit Do the firms prefer the tax or the tradable permits? (Hint: compare profits under each regime.) Would your answer change if the government auctioned the permits rather than allocating them freely and uniformly? If so, how? Explain using words or math.