Question 1. Discuss how the criterion for efficiency in the dynamic context of

1. Discuss how the criterion for efficiency in the dynamic context of stock pollution differs from the criterion in a static context in which there is no temporal aspect to damage from pollution.

Discuss the role of two key factors or parameters relevant to the dynamic context. (5)

2. Consider the case of a single polluter and regulator. The regulator knows the marginal benefit of pollution abatement (equivalent to saying the regulator knows the marginal damage from pollution) but he does not know the marginal cost of pollution abatement for the firm. If the regulator proposes to implement a fee on pollution and asks the polluter to reveal the marginal cost of abatement, discuss how the polluter will respond and type of outcome that would result. (5)
Alternatively, if the regulator proposes to give away free permits what would happen? (5)
What if the regulator announces a coin flip will decide whether the policy will be fees or free permits. (5)
Hint: Assume that regulator intends to set the fee or the level of permits at the point where Marginal benefit of pollution abatement equals marginal cost of pollution abatement.

3. Assume that the regulator knows the marginal cost of abatement fairly well but there is uncertainty about marginal benefit of abatement. Depict the potential dead weight loss (DWL) that might result from using emission fees based on expected marginal benefit. (15)

4. Answer Q3 for an emission cap based policy using the same marginal benefit curves you used in Q2. (15)

5. Answer Q3 for two different slopes of the marginal benefit curve, one very steep and another relative flatter. Show graphically what happens to the DWL under the two cases and discuss the implications for emission fees versus emission caps. (15)

6. Discuss what types of activities comprise the notion of transaction cost. Describe how transaction cost in private markets differ from transactions costs that might arise under government regulation. (5)
Hint: Refer Krutilla and Krause.
Required reading is until end of Section 2.1

7. Discuss a subsidy-based scheme to encourage polluters to dispose their hazardous waste in a responsible manner, say to a collection agency as opposed to dumping illegally. Discuss the merits and shortcomings of such an approach. (10)

8. Compare and contrast the tax and tradable permits scheme from the perspective of commitment in a society with well defined property rights (i.e., property rights cannot be confiscated without compensation). (5)

9. Discuss how the lack of a commitment by the regulator to a long-run regulatory strategy may affect behavior polluters. (5)

10. Discuss some reasons for which individual consumers or households might be motivated to provide public goods such purchase of greener but costlier goods etc. Also discuss some reasons that might explain why private firms may engage in such behavior. Why is it a greater challenge to explain the economic motivations for the latter as opposed to such behavior by households consumers? (10)

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