Exercises on environmental economics

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1 - Question 1 In a PPV scenario the price of emission credits is: 1. Defined by the government after the analysis of the TC function of the polluter 2. Defined by the government after the analysis of the TC function of the victim of pollution 3. Decided by the polluter who can act as a monopolist 4. Defined in the free market - Question 2 A Market failure is likely to emerge: 1. Only when there is a monopolist in the market 2. When there are externalities only if there is a monopolist in the market 3. Any time a public good is traded in the market 4. When there are externalities - Question 3 A pure public good is: 1. Non excludable 2. Non rivalrous 3. Both 4. None Reasoning question Describe what happens in a PPV scenario, if a new technology is introduced in the market. Explain under which conditions this technology is adopted by the polluter. How your answer change if any policy exist? - Exercise 1 Two firms A and B operate in the same town. The firm A is a polluter, i.e. generates a negative externality associated with 1 unit of harmful emissions for any unit of good produced. The firm B produces a clean good, however, it suffers the negative externality. The total cost functions are: CTA(a)= a2 CTB(b)= b2/2+E(x) Where E(x)=2x2 and x=a/2 Assume perfect competition, the market prices of the two goods are pa = 2 and pb = 1. 1. Find the profit maximizing quantities for the two firms, x* and y*, and calculate the social welfare associated. 2. How does the answer to the previous point changes if the firm A, pays B for polluting? 3. Assume that a new green technology has reduction costs A(x)= z-z2. What is the emission in this case? How much the welfare will increase?