Question 1  : Policy choice

Suppose that you work at the United Nations, and you are asked to provide advice to member countries on setting up a policy to reduce their GHG emissions.

a) Suppose that you are advising a country in which the population is very supportive of taking strong action to reduce carbon emission. Explain in details which policy you would recommend, why, and how you would recommend implementing it. What are the advantages of implementing the policy in the way that you have suggested?

b) A second country comes to ask your advice. The president explains to you that his main concern with implementing a GHG emission reduction policy is that he fears many firms will leave the country if the costs of the policy are too high. Would you keep the same recommendation as in (a)? If so, why? If not, what would you recommend instead, and why?

Question 2 : Price v.s. quantity controls

a) Environmental economists often talk about the "equivalence of taxes and cap and trade" (or,in more general terms, the "equivalence of price and quantity controls"). What do they mean by that? Illustrate your answer with a graph.

b) Does this equivalence still hold when there is uncertainty on the MCA curve, but not on the MBA curve? Why? Provide both a graphical and intuitive explanation.

c) Does this equivalence still hold when there is uncertainty on the MBA curve, but not on the MCA curve? Why? Provide both a graphical and intuitive explanation.