Юртайкина Юлиана Б1117-38.03.

01(3)
HW 1. 100 points + 4 bonus points. Please write clearly. Show how you derive your
answer. Writing that is unreadable gets zero points.
**1. [30 points + 4 bonus points, 3 points for each sub question] Demand is given by the

indirect demand function P [Q]  60  Q , supply by P [Q ]  Q . Assume that the suppliers are
D S

all small, identical businesses.

a) Draw the supply & demand curve

b) What is the equilibrium quantity and equilibrium price?

PD=PS
60-Q*=Q*
2Q*=60
Q*=30.
P*=30.
We find that the production involves pollution. The pollution creates an externality and the
externality has a marginal cost equal to 2Q (thus PEXT [Q]  2Q ).
c) Draw in the supply & demand curve the total damage of pollution in the market
equilibrium.
 d) [2 bonus points] ***Use integration to determine the total damage of pollution 𝟑𝟎
30
∫0 (2𝑗)𝑑𝑗 = 302 = 900
e) What are the equilibrium price and quantity in the social optimal outcome? (the social
optimal outcome takes in account private cost and externality costs).
PD=PS
60-Q**=3Q**
4Q**=60
Q**=15;
P**=45
f) Draw the optimal pollution in the supply & demand curve

g) [2 bonus points] ***Use integration to determine the total damage of optimal pollution
15
∫ (2𝑗)𝑑𝑗 = 152 = 225
0

h) Now suppose the government decides to address the externality with a carbon tax. h)
What is the optimal carbon tax? (remember that the tax is on emissions, not on production!)
Налог (t) = MCEXT=2Q**=2*15=30
i) How much tax revenue does the government collect with the optimal carbon tax?
Сборы по налогу = 30*15=450
j) What should the government do with the collected tax revenue of the carbon tax?
Правительство может потратить собранные деньги например на постройки
сооружений для очищения морей, озер, сколько животных гибнет каждый день от
загрязнения. Также можно начать заново садить деревья, в той же Сибири, где тоннами
вывозится древесина.
Now suppose the government decides to address the externality with a carbon trading
mechanism (Emission Trading System)
 k) How many emission permits should the government make available to the market?
(remember, the permits are for emissions, not for production!).
Выбросы были 2Q*=60 до обнаружения
Выбросы составили 2Q**=30 после обнаружения
Исходя из этого, государству следует установить разрешения на 30 выбросов.
l) What is the price of a permit in equilibrium?
Цена должна соответствовать налогу pp=t=30.
** 2. [21 points: 7 points for each sub question] Suppose Sweden has 2 sectors that emit CO2.
Sector one, transportation, and sector 2, electricity. They have the following macc's:
macc1[ x1 ]  2 x1 , macc2[ x2 ]  5 x2 .
The Swedish ecologists and economists determined that Sweden needs to reduce it's emission
by 70 units.
a) What would be the total policy cost if we simply set emission standards and thus ordered
each sector to abate 35 units? Assume that acc1[0]  acc2[0]  0 . (hint: first derive the acc
functions by integration).
5
Acc1[x1] = 𝑥12 ; Acc2[x2] = 2 𝑥22
Ac1 = 352 = 1225
5
Ac2 = 2 × 352 = 3602.5
Tac = 1225 + 3062.5 = 4287.5
Suppose Sweden decides to use a carbon tax.
a) What is the optimal tax rate and the optimal abatement by each sector?
𝑚𝑎𝑐𝑐1 = 𝑚𝑎𝑐𝑐2 = 𝑡
2𝑥 = 5𝑥2 = 𝑡
{ 1
𝑥1 + 𝑥2 = 70
5 𝑡
𝑥1 = 𝑥 2 =
{ 2 2
𝑥1 + 𝑥2 = 70
5
𝑥 + 𝑥2 = 70
2 2
7
𝑥 = 70
2 2
𝑥2 = 20
𝑥1 = 50
𝑡 = 100
b) What is the total policy cost of abating 12 units using the optimal tax rate? Is it
cheaper than setting emission standards?
1. Optimal tax rate:
𝑚𝑎𝑐𝑐1 = 𝑚𝑎𝑐𝑐2 = 𝑡
2𝑥 = 5𝑥2 = 𝑡
{ 1
𝑥1 + 𝑥2 = 12
5 𝑡
𝑥1 = 𝑥 2 =
{ 2 2
𝑥1 + 𝑥2 = 12
24
𝑥2 =
7
60
𝑥1 =
7
120
𝑡=
7
60 5 24
Tac = ( 7 )2 + 2 × ( 7 )2 = 102.9
2. Setting emission standards:
5
Acc1[x1] = 𝑥12 ; Acc2[x2] = 2 𝑥22
Ac1 = 62 = 36
 5
Ac2 = 2 × 62 = 90
Tac = 36 + 90 = 126
Дешевле использовать снижение с использованием оптимальной налоговой ставки.

** 3. [24 points: 6 points for each sub question] Suppose Sweden has 3 sectors that emit CO2.
They have the following macc's:
macc1[ x1 ]  x1 , macc1[ x1 ]  2 x1 , , macc2[ x2 ]  4 x2 .
Suppose Sweden decides to use a carbon tax.
a) What will be the optimal carbon tax and the optimal abatement by each sector?
𝑚𝑎𝑐𝑐1 = 𝑚𝑎𝑐𝑐2 = 𝑚𝑎𝑐𝑐3 = 𝑡
𝑥 = 2𝑥2 = 4𝑥3 = 𝑡
{ 1
𝑥1 + 𝑥2 + 𝑥3 = 70
𝑥2
2𝑥2 + 𝑥2 + = 70
2
7
𝑥 = 70
2 2
𝑥2 = 20
𝑥1 = 40
𝑥3 = 10
𝑡 = 40
Suppose Sweden decides to use a carbon trading (EMS). So they auction a number of premits
to the market. The number of permits is equal to the total emissions as business as usual (BAU)
minus 70. Suppose that now (BAU) each firm emits 70 units of CO2.
b) Derive the demand functions for permits for all three sectors. (Hint: the demand function
has the form p1  f [ pp] , where p1 is the number of permits demanded by sector 1 and
pp is the price of a permit. First write the total cost functions for sector 1 and 2. The total
cost functions include the cost of abating and the cost of buying permits. Also remember,
that a sector abates 70  p1 , the total abatement needed minus the number of permits it
buys)
𝑥12
𝑎𝑐𝑐1 = ; 𝑎𝑐𝑐2 = 𝑥22;𝑎𝑐𝑐3 = 2𝑥32
2
1.
(70 − 𝑝1 )2
𝐶1 [𝑝1 ] = + 𝑝𝑝 ∙ 𝑝1
2
𝑑𝐶1 [𝑝1 ]
𝐹𝑂𝐶: 0 =
𝑑𝑝1
= −(70 − 𝑝1 ) + 𝑝𝑝
= −70 + 𝑝1 + 𝑝𝑝
𝑝1 = 70 − 𝑝𝑝
2.
𝐶2 [𝑝2 ] = (70 − 𝑝2 )2 + 𝑝𝑝 ∙ 𝑝2
𝑑𝐶2 [𝑝2 ]
𝐹𝑂𝐶: 0 =
𝑑𝑝2
= −2(70 − 𝑝2 ) + 𝑝𝑝
= −140 + 2𝑝2 + 𝑝𝑝
 140 − 𝑝𝑝
𝑝2 =
2
3.
𝐶3 [𝑝3 ] = 2(70 − 𝑝3 )2 + 𝑝𝑝 ∙ 𝑝3
𝑑𝐶3 [𝑝3 ]
𝐹𝑂𝐶: 0 =
𝑑𝑝3
= −4 70 − 𝑝3 ) + 𝑝𝑝
(
= −280 + 4𝑝3 + 𝑝𝑝
280 − 𝑝𝑝
𝑝3 =
4

c) Argue why it is true that p1  p2  p3  140 and a1  a2  a3  70 (where pi stands for

the number of permits bought by sector i and ai for the abatement by sector i)
Количество разрешений равно общему объему выбросов и минус 70,
следовательно: 𝑝1 + 𝑝2 + 𝑝3 = 70 + 70 + 70 − 70 = 140
d) Derive the price of a permit. (Hint: A sector thus must abate 70 units or buy a permit.
And there are 140 permits to compete for.) And the number of permits that each sector
obtains and the number of units each sector abates.
𝑝1 = 70 − 𝑝𝑝
140 − 𝑝𝑝
𝑝2 =
2
280 − 𝑝𝑝
𝑝3 =
4
{𝑝1 = 𝑝2 = 𝑝3 = 140
140 − 𝑝𝑝 280 − 𝑝𝑝
140 = 70 − 𝑝𝑝 + +
2 4
280 = 4𝑝𝑝 + 280 − 2𝑝𝑝 + 280 − 𝑝𝑝
7𝑝𝑝 = 280
𝑝𝑝 = 40
1. 𝑝1 = 70 − 𝑝𝑝
𝑝1 = 30
𝑥1 = 70 − 𝑝1 = 40
140−𝑝𝑝
2. 𝑝2 = 2
𝑝2 = 50
𝑥2 = 70 − 𝑝2 = 20
280−𝑝𝑝
3. 𝑝3 =
4
𝑝3 = 60
𝑥3 = 70 − 𝑝3 = 10

e) What is a relatively fast shortcut to check if we got the right answer to this carbon trading
problems?
𝑝𝑝 = 𝑡 = 40 – говорит нам о том, что условие выполнено и решение верное
**4. [25 points] Assume there are only coal and gas plants in a country. For each unit of electricity
produced, the coal plant emits two units of emission, and the gas plant only one. The country
demands 10 units of electricity a year and the demand is perfectly inelastic. In the BAU scenario,
no measures are taken to limit emissions.
Assume perfect competition and that the marginal cost of the coal and the gas plants are given as:
MCG[g]16
MCC [c]  2c

Если использовать газ , то затраты составят 16*g=16*10=160.

Если использовать угль, то затраты составят c2=102=100.

На рынке будет использовать только уголь, так как он дешевле чем газ.
p=MC=2c=20 (pp=0, нет регулирования). Производство угля = 10. Производство газа = 0.
Выбросы CO2 в год = 10*2=20 ед.
Затраты будут равны 100.
Now an Emission Trading System is introduced and, for each unit of emission, a permit
(or emission license) must be bought and surrendered. The total number of permits issued is 11.
b) [8 points] How much will coal and gas produce and what will be the price of electricity
in the market? What will be the price of the emission permits? What are the total yearly production
costs? What are the average yearly costs of abatement (with respect to the BAU scenario)? Draw
the outcome in a graph and calculate.

Energy: c+g=10
Carbon: 2c+g=11
 2(10-g)+g=11
g=9; c=1
Costs:
-Gas: 9*16 = 144
-Coal: 12 = 1
Total cost: 145
p=MCC+2pp=MCG+pp.
2+2pp=16+pp
pp=14
p=2+28=16+14=30
Стоимость снижения выбросов = 145-100=45.
Now an efficiency measure is mandated by law. As a result, the demand of electricity falls
by 30% - thus now only 7 units of electricity are demanded. The efficiency measures have a yearly
cost of 100. The number of permits stays the same (11).

с) [7 points] How much will coal and gas produce and what will be the price of electricity
in the market? What will be the price of the emission permits? What are the total yearly production
costs? What are the average yearly costs of abatement? Draw the outcome in a graph and calculate.
c+g=7
2c+g=11
c=4
g=3
CostG[g]=16*3=48
CostC[c]=42=16
Затраты на Меры по повышению эффективности 100. Итого затраты = 48+16+100=164
P=MCC=MCG MCC=2*4+2pp MCG=16+pp 8+2pp=16+pp pp=8
p = 8+16=24.
Рост затрат составил: = 164-145=19.
d) [4 points] Did the efficiency measure added to the ETS increase or decrease the average
yearly cost of abatement?
Данная новая мера повысила среднегодовой стоимости на 19ед.
* Not a potential exam question, but understanding of the task is necessary to be able to
answer potential exam questions (the task is most likely part of potential exam questions)
** Potential exam question
***Not a potential exam question, because the question is higher level or more abstract or
more general than a potential exam question. Being able to answer the question does help to lift
the students knowledge to a higher level (and will thus support exam performance).