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D, E and F 1) A policy maker is faced with the following MDF from the emissions

ID: 1190909 • Letter: D

Question

D, E and F

1) A policy maker is faced with the following MDF from the emissions of nitrous oxide: MDF = 1000 E (where E = tons of emissions). Research leads the policy maker to perceive that the industry MAC function is MAC = 130,000 – 1000E

a) What will be the perceived economically efficient target of emissions?

1000E = 130,000 – 1000E

2,000E = 130,000

E = 130,000 / 2,000

E = 65

b) What is the emissions fee that generates that target?

Emission fee = MDF = 1,000E = 1,000 × 65 = 65,000

c) What is the aggregate level of permits that generates that target?

Aggregate level of permit = MDF × E

                                          = 65,000 × 65

                                          = 4,225,000

d) If there is a thick market for permits, what will be the market price of a permit?

e)The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using an emission fee.

f) The actual MAC is MAC = 150,000 – 500E. Find or show the cost of an error from using cap and trade.

Explanation / Answer

e) 1000E = 150000 -500E

E= 100

Difference in emission fee = 100000 - 65000 = 35000 (cost of error)