Question

Attempts: Score: /2 1. Pollution Demand - I Scenario: This set of questions translates a supply and demand schedule for an output to demand for pollution. Suppose the output is kwh of electricity, and each kwh of electricity generates 0.5 tons of CO2. The supply and demand schedules for electricity are as follows: Quantity of Electricity Demand for Electricity Supply of Electricity Quantity of Pollution (kwh) (WTP) (Cost) (tons of CO2) 100 Suppose the pollution price is $50 per ton of CO2. What is the quantity of pollution demanded? (Hint: a) figure out the electricity tax based on the pollution price; b) Determine the tax wedge (this is the difference between Demand and Supply) for each quantity of electricity i.e. Okwh, 1kwh, 2kwh... c) Quantity of pollution demanded will be where the tax calculated in (a) and (b) are the same.)

Answer 1

From the given table: Quantity of Demand for supply of Quantity of Revenue from Cost pf Cost of electricity electricity electricity pollution (tons electricity Production pollution Cp Profit = R-C- (kwh) Q (WTP) P (Cost) S o f CO2) Op R=Q*P C=Q*s = 50*QpCp 0.00 100.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 80.00 5.00 0.50 80.00 5.00 25.00 50.00 2.00 60.00 10.00 1.00 120.00 20.00 50.00 50.00 3.00 40.00 15.00 1.50 120.00 45.00 75.00 0.00 4.00 20.00 20.00 2.00 80.00 80.00 100.00 -100.00 5.00 0.00 25.00 2.50 0.00 125.00 125.000 -250.00 Here we can see from the above table that the quantity of pollution demanded is 1.50 tons as the profit is 0.