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June 28, 2017 ENERGY ECONOMICS – FOLDER 2 M.Sc. in Energy Engineering Duration: 2 hours and 30 minutes During the test students are not allowed to use class notes or textbooks or to leave the classroom Mark the exam folder with your Name, Last Name and Politecnico di Milano Id. Number At the end of the test hand over only the exam folders Name Last Name Id. Number Instructions and grading system Read the questions carefully and provide answers to all the points raised in each question. It is important to use a correct and appropriate terminology for all economic and technical terms. Remember to define all variables and parameters used in your answers. A full score will be awarded only if the answer is correct and complete. A partial score will be awarded only if the partial response, albeit incomplete, does not contain any errors. 2 Question 7 (7 points) Polluting emissions generate a negative externality. The total external costs of emissions are described by the following function: EC(M) = 3M2/8. The true benefit of pollution arising to the polluter (unknown to the government) is described by the following function: BT(M) = 10M – 7M2 /8. However, there is uncertainty about actual marginal benefits of pollution. The government believes (wrongly) that benefits of pollution are described by the following function: BG(M) = 5M – 3M2 /4. (7a) Identify the maximum level of pollution from the true benefit function and the socially optimal level of emissions (7b) Identify the pollution target that the government would set according to the information it has about marginal benefits of pollution (7c) Suppose there is just one polluting firm. The government sets an overall pollution target (enforced by means of command-and-control regulation) based on its information about…