Thursday, December 13, 2007

Global Warming


In the Global Warming question on the 2005 exam, the answer to part d states:

"It would get 20 each from India and China and 80 from the rest of the world."

Why is this?


So, the starting point is that China and India each has 120 permits and the rest of the world has 180. Furthermore, since the US pollutes 300 units, it would like to buy 120 permits if it can do so at a cost of $25 or less, since that is the minimum cost for the US to clean up. Now, China and India, if they clean up 100 units (which is the first "block" of marginal cost), each have 20 permits left over to sell. They will choose to sell these 20 permits each at a minimum price of $10 and $15 respectively, since that is what it cost to clean up rather than use them. The rest of the world, if it cleans up 100 units, still has 200 units of pollution and only 180 permits, so it needs to either buy permits or keep cleaning. The second block of cleaning has a MC of $20, and if they clean up this block then they have 80 permits to sell. They will sell the permits and clean if they can get a minimum price of $20.

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