1. Address the following topics: (a) Explain why industrial pollution may undermine the efficiency of competitive market

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1 Address The Following Topics A Explain Why Industrial Pollution May Undermine The Efficiency Of Competitive Market 1 (110.59 KiB) Viewed 27 times

1. Address the following topics: (a) Explain why industrial pollution may undermine the efficiency of competitive markets and how, in theory, markets for rights to pol- lute may reestablish it, stating the Coase Theorem and defining ef- ficiency, competitive equilibrium, transaction costs and any other relevant technical concepts as part of your answer. (b) Assuming that firms have the right to pollute and identifying (mar- ginal) benefits and costs of pollution abatement, argue that a private market for abatement services is unlikely to exist when such services are a public good, defining relevant technical concepts as part of your answer. 2. Focusing on cases in which transaction costs prevent the existence of a private market for pollution abatement rights, address the following issues: (a) Describe alternative regulatory approaches to mitigate the effect of pollution externalities, including Emissions Standards, Pigouvian taxes and Cap&Trade, assessing the feasibility and desirability of these ap- proaches taking into account that information gathering and process ing costs are larger when the regulatory procedure requires more dis- aggregate information. (b) Taking into account the presence of informational asymmetries be- tween the government and firms, government estimates of aggregate costs are likely to be imperfect. Identify cases in which emissions standards are expected to perform better and cases in which they are expected to preform worse than taxes in view of the possibility of estimation errors. 3. Consider a competitive industry whose output is valued according to mar- ginal benefit MB = 200 - Q by consumers and whose production en- tails a private marginal cost MC = 50 + 20 but also an external cost MCE = 30+20 associated to air pollution resulting from the production process. (a) Find the socially efficient quantity of output Q*. (b) What quantity Qº will be produced by the market? Is this quantity efficient? If not, obtain the deadweight loss. (c) Assuming that the producers do not have the right to pollute the air but they can legally buy the rights from potential victims, what price PR would they pay for those rights (assume that one right to pollute