The city government has the following three policy options:

Special Topic – Policies for Pollution Control (20 points)

Assume that, in the city of Bloomington, there are two factories that emit “pollutox” – a type of pollutant that smells terrible and has severe health impacts on city residents. Currently, the two factories emit 150 tons per day (tpd) in total. The widget factory emits 100 tpd. The gadget factory emits 50 tpd.

To better the city’s air quality and protect people health, the Bloomington city government decides to regulate emissions of “pollutox” from the two factories. Overall, the regulatory goal is to reduce total emissions by 30%, or 45 tpd. In other words, the two factories will be allowed to emit only 105 tpd in total after the regulation takes effect.

The city government has the following three policy options:

Policy Option A

The government mandates a technological standard on both emitters. That is, it requires that both emitters install filters to treat their exhaust air.

Policy Option B

The government mandates a performance standard on both emitters. That is, it requires that both emitters – using whatever technology available – reduce their individual emissions levels by 30%. In other words, the widget factory needs to reduce its emissions by 30 tpd; the gadget factory needs to reduce its emissions by 15 tpd.

Policy Option C

The government implements a cap-and-trade system.

First, it gives emissions allowances to emitters. The widget factory gets 70 allowances. The gadget factory gets 35 allowances. Each allowance corresponds to one tpd of “pollutox”.

Second, emitters are allowed to trade their emissions allowances at will. For instance, if the widget factory decides to sell 10 allowances to the gadget factory and the gadget factory agrees, they can execute this transaction without interference from the government.

Third, every day, each factory is only allowed to emit up to the amount that is allowed by the amount of emissions allowances it holds. For instance, if the widget factory holds 60 allowances, it is permitted to emit only 60 tpd of “pollutox”.

The table below gives the technological options available to each factory to reduce pollution.

Given the above information, here are some questions that the city government would like you, the policy consultant, to answer:

1. What’s the total compliance cost (i.e. two factories combined) if the government chooses Policy Option A? Briefly explain your rationale and steps of calculations. (4 points)

2. What’s the total compliance cost (i.e. two factories combined) if the government chooses Policy Option B? Briefly explain your rationale and steps of calculations. (4 points)

3. If the government chooses Policy Option C, which factory will have the incentive to buy allowances? Which will have the incentive to sell allowances? (4 points)

4. Following question 3, how many allowances will be traded? In what direction (i.e. from which factory to which factory)? Briefly explain your rationale and relevant calculations. (4 points)

5. Following question 3 and 4, what is the total compliance cost (i.e. two factories combined) if the government chooses Policy Option C? Briefly explain your rationale and relevant calculations. (4 points)

Short Essay Questions (5 points each)

1. Name and explain the three levels of sociocultural systems. (2 points) Give one real-life example in each level. (1 point) Explain the “Duality of Human Life”. (2 points)

2. From a neo-Malthusian perspective, in what ways can technology cause environmental degradation? (2.5 points) In what ways can technology ameliorate environmental impacts? (2.5 points) Use real-life examples to explain

3. What is “green consumption”? (1 point) How could it address environmental issues and produce jobs? Use real-life example to explain. (1 point for each example) What are the potential pitfalls of green consumption? Give two examples. (1 point for each example)

4. Which of the following environmental problems is better suited to solutions derived from the Coase theorem: (a) land-use disputes on adjacent parcels of private property; or (b) reducing water pollution across a region? Explain. (1 point for direct answer, 2 points for each explanation)