The City Council in the previous problem again wants to curb emissions byhalf. This time, it sets a…

1. The City Council in the previous problem again wants to curb emissions byhalf. This time, it sets a tax of $T per day on each ton of smoke emitted. Howlarge will T have to be to effect the desired reduction? What is the total cost tosociety of this policy?

2. Instead of taxing pollution, the city council decides to auctionoff four permits, each of which entitles the bearer to emit 1 ton of smokeper day. No smoke may be emitted without a permit. Suppose the governmentconducts the auction by starting at $1 and asking how many permits each firmwants to buy at that price. If the total is more than four, it then raises the priceby $1 and asks again, and so on, until the total quantity of demanded permitsfalls to four. How much will each permit sell for in this auction? How manypermits will each firm buy? What will be the total cost to society of this reductionin pollution?

 

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