Assignment 3 Avenue Drop Box 11:59 PM Wednesday March 25, 2015

Question #1: [40 marks] Each numerical solution is worth 5 marks

There are two sources of emissions.

MAC1 = 300 – 10E1

MAC2 = 150 – 5E2

Aggregate target emissions = 30 = E1 + E2

15 permits are given to each source of emissions.

(a) After permit-trading, the equilibrium solutions are: E1 = 20 A1 =10 E2 = 10 A2 =20

(b) Number of permits bought and sold = 5 bought by firm 1, 5 sold by firm 2

Permit Price = $100

(d) Net gain of due to trading of permits are: Net gain of source 1 = $125 Net gain of source 2 = $62.50 Question #2: [48 marks] Each numerical answer is worth 4 marks.

There are two sources of emissions.

MAC1 = 300 – 10E1

MAC2 = 150 – 5E2

(a) Assume that the tax rate is $100 per E.

Solve the cost minimizing emissions as E1 and E2.

E1 = 20 E2 = 10

(b) Assume that the tax rate is $100 per E. Solve following:

TAC1 = $ 500 Total tax-payments from source 1 = $2000 TAC2 = $1000 Total tax-payments from source 2 = $1000

(c) Assume that the tax rate is $100 per E. If source 1 reduces MAC1 to a level where new MAC1 = 150 – 5E1, what will be the gain of Source 1?

Gain = $500

(d) Assume that the subsidy rate is $100 per A. Find the following optimal values based on original functions:

A1 = 10 Total subsidy received by Source 1 = $ 1000

A2 =20 Total subsidy received by Source 2 = $ 2000

(e) Assume that the subsidy rate is $100 per A. If source 1 reduces MAC1 to a level where new MAC1 = 150 – 5E1, what will be the gain of Source 1?

Gain = $ 500

Question #3: [12 marks] (a) Should Canada impose carbon tax?

(i) If the answer is yes, outline favorable effects of carbon tax.

Yes, it satisfies cost efficiency criteria with lowest possible aggregate abatement costs. It leads to abatement reduction