Explorations

PROBLEMS

Problem 1. The PPP Principle Versus Efficiency

The PPP principle says that polluters must pay in proportion to their pollution. This example tries to illustrate how an efficient scheme could satisfy this condition.
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1. Would any tax on all emissions satisfy the PPP? Very Briefly Explain.
2. Would any tax on all emissions be efficient? Very Briefly Explain.
3. Suppose that each polluter was charged a tax of $12 a tonne, but each polluter had to pay an extra charge of $10,000 just for emitting anything. Does this satisfy the PPP condition? Could it be efficient? Very Briefly Explain.

·SUGGESTED ANSWER

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Problem 2. Enforcement Costs and the Feasibility of Regulation

Suppose that you are charged with choosing among three regulatory schemes for regulating auto emissions. The first is to equip all vehicles with wireless emissions monitoring devices and send motorists a monthly bill based on their emissions. The second is to add an air-pollution surcharge to fuels. The last option is to implement an emissions standard system, whereby all new cars must pass specific emissions criteria. Cost data follows.

Amortized Annual Costs (Millions of dollars)
	Regulatory Cost	Total Damages	Total Abatement Costs
Wireless Monitoring Device	1,600	3,000	890
Fuel Surcharge	200	5,000	640
Emissions Standard	2,000	2,400	1,640

Which Scheme would you choose? Briefly explain why.

·SUGGESTED ANSWER