Which system is better the permit system or the tax system

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Reference no: EM133950654

Assignment:

Emissions from cars and trucks release a large amount of particulate matter into the air with large negative impacts on local health. Imagine that the best available science suggests that the marginal social damages of emitting particulates from vehicles can be expressed by the equation, MD = 5e, where e is the quantity emitted. Further imagine that the marginal benefits associated with emissions reductions are uncertain. The best available estimate on which regulations can be set is MB = 100-5e. However, the true marginal benefits from emissions are either MB1 = 80-5e or MB2 = 120-5e, but are unknown when the regulation is passed.

(a) What is the optimal number of permits if the government uses its best estimate of MB?

(b) What is the optimal tax rate if the government uses its best estimate of MB?

(d) What should be the optimal tax rate once the true MB is known (solve this for both MB1 and MB2)?

(e) Identify the deadweight loss from using the estimated MB instead of the true MB under the permit system?

(f) Identify the deadweight loss from using the guessed MB instead of the true MB under the tax system?

(g) Which system is better, the permit system or the tax system?

Reference no: EM133950654

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