Answer Happy

The Canadian government is considering a new environmental
policy framework that would address environmental externalities in
oilseed production. Your job is to advise the government on the
economic consequences of proposed policies.
A demand function for oilseeds has been estimated as 𝑃 = 20 −
1.4𝑄 and a supply function has been estimated as 𝑃 = 1 + 0.5𝑄.
Scientists and economists at Environment Canada have estimated that
there is a $1.50 negative environmental externality imposed at
every level of output through increased CO2 and contamination of
the watershed. The government has proposed a tax on production to
“internalise the externality”.
1. Draw the diagram for this market without the policy and solve
for all relevant Ps and Qs. Calculate producer surplus. (4
marks)
2. Modify your diagram to include the proposed Pigouvian tax
that would internalise the externality. Solve for, and label, all
relevant Ps and Qs. Calculate producer surplus under this policy.
Is there government revenue from this policy? If so, how much? (4
marks)
3. Some dissenting scientists at Environment Canada disagree
with the estimate of $1.50 for the environmental externality. They
believe that the incidence of the externality is not constant
across different levels of production; instead the size of the
externality is proportional to the level of output. That is, the
larger is the output, the larger is the externality. Their research
suggests that the true social cost of cereal production diverges
from private costs at every level of production by an amount equal
to ten percent of production (note: ten percent, not ten percentage
points).
The government would like to know the economic effects of
implementing a tax to internalise the externality in this case.
Draw the diagram for this market and policy. Solve for all relevant
Ps and Qs. Calculate producer surplus. (6 marks)
4. The government is also considering a cap and trade system
that would restrict production with a quota. The proposed quota
would limit production to 9.5 units. Draw the diagram for this
market and policy. Solve for all relevant Ps and Qs. Calculate
producer surplus. (4 marks)
How would the welfare of producers be affected by the
government’s decision to grant production quotas to existing
producers versus competitively auctioning production quotas (note:
you don’t have to solve this numerically, just provide a short
explanation of the difference).