Manufacturing processes that rely on fossil fuels create carbon dioxide and othe

Question

Manufacturing processes that rely on fossil fuels create carbon dioxide and other greenhouse gases that may contribute to global wanning. Suppose you are in charge of designing an economic policy to reduce carbon dioxide emissions: The inverse demand function for fuel is: P = 10 - 1/4Q The private cost of producing the fuels that emit carbon dioxide is: C^P(Q) = 10 + 1/12Q^2 Atmospheric scientists have computed that the environmental exist of fuels (due to greenhouse gas emissions) is: C^E(Q) = 1/2Q^2 1. What is the market clearing price and quantity if only the private cost is considered? 2. What is the efficient price and quantity if both the private cost and social costs are considered? 3. What is the deadweight loss if firms does not take into account the externality? 4. Suppose the government imposes a carbon quota, Q. At which level should the quota Q be set to achieve an efficient outcome? 5. How much should the government tax this good to arrive at the efficient quantity of carbon? 6. Historically lead has been used in the production of paints and many other manufacturing processes. Lead, however, can seep into the topsoil and contaminates water supply and land, creating significant health risks for people who live in those areas. For example, the Gowanus Canal in Brooklyn was polluted enough by lead to be declared a superfund site. In the case of a superfund, federal tax dollars are used to clean up an area. How is this situation different from the emission of carbon dioxide? Give an economic explanation, using concepts that we've learned in class.

Explanation / Answer

A tariff-rate quota (TRQ) is a trade policy tool used to protect a domestically-produced commodity or product from competitive imports. A TRQ combines two policy instruments that nations historically have used to restrict such imports: quotas and tariffs.

Suppose the government imposes a Carbon quota Q . At which level should the quota Q be set?

The quota will be set at Q = 17.16

just the amount that the rm would produce if they took the social costs into account.

How much should the government tax this good to arrive at the efcient quantity of carbon?

The government wants to impose a tax on the good so that Q = 17.16 gets produced.

The easiest way to solve this is just to have the tax equal to the marginal external cost at a quantity of Q = 17.16 . Thus will give us a tax of:

= MEC

= Q /6 = 17.16 / 6 = 2.86

Let’s check that this works. Let’s set supply equal to demand including a tax of size = 2.86 on producers:

Q D ( p ) = Q S ( p - )

40 - 4 p = 6( p - )

40 + 6 × 2.86 = 10 p

So price will be 10 p = 57.10 or p = 5.71 and thus we get Q = 17.16.

6. The proposed fiscal 2013 budget would reduce spending on the superfund program, which would see its funding cut by $38 million. The budget proposal calls for approximately $1.18 billion for the superfund program in fiscal 2013, compared to the $1.21 billion fiscal 2012 enacted level. Most of the savings are attributed to targeted reductions to the Hazardous Substance Superfund Remedial Program, which would see its budget cut by $33 million to $532 million in fiscal 2013. The reductions will target non-time critical activities in order to ensure that the funding cut does not negatively affect public health, according to the budget. The president also proposed to reinstate the superfund tax on petroleum products and hazardous chemicals. The tax, which would be used to support the hazardous waste cleanup fund, would generate an estimated $1.45 billion in revenue in fiscal 2013, according to the budget proposal. The administration has proposed in previous budget requests to reinstate the tax, although Congress has rejected the proposal. In total, the budget estimates that reinstating the superfund tax would generate approximately $21 billion in revenue from fiscal 2013 through fiscal 2022.The budget proposal calls for the leaking underground storage tanks program to receive $104 million in fiscal 2013, consistent with the fiscal 2012 enacted level. EPA would receive $93 million in funding for the assessment and cleanup of brownfields contaminated sites, a $2 million reduction from fiscal 2012.

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