1. The Clean Air Act instituted trades between states for SO2 emissions. Several utility companies across geographic borders have engaged in such trades in recent years. Consider a trade between a utility in Wisconsin and the TVA in Tennessee. Assume that the trade reduces Wisconsin electricity consumers’ bills by a total of $ 1 million, and lowers Tennessee electricity consumers’ bills by $ 500,000. Also assume that the trade improves local environmental quality in Wisconsin by an amount that people value at $ 2 million. If the local environmental quality in Tennessee declines as a result of this trade, then indicate a potential Coase agreement that could avoid the environmental decline and would still make the trade profitable to both parties ? Is such a trade possible in this scenario ? (4 points)
2. Chip and Dale run separate logging companies in the same forest. Both pollute the river flowing through the forest with debris from their work. In the table below, the first row shows the current level of debris that makes its way into the river from their work. The following rows show how much it would cost each logger to reduce its pollution by additional increments of 10 pounds. You are the official from the EPA who is responsible for the reduction of this pollution. Fully describe the cost-effective mechanism that you will design to reduce the current level of debris by half. (4 points)
Companies
Chip
Dale
Current debris in pounds
60
80
Cost of reducing debris by 10 pounds
$5
$2
Cost of reducing debris by a second 10 pounds
$10
$4
Cost of reducing debris by a third 10 pounds
$15
$6
Cost of reducing debris by a fourth 10 pounds
$20
$8
Cost of reducing debris by a fifth 10 pounds
$25
$10
3. Four companies, Alpha, Beta, Gamma and Delta, are burning coal to produce electricity. As a result, they also produce emissions. The first row of the table below shows the total pounds of emissions currently produced by each firm. The other rows of…