ECON 431 Final: ECON 431 Cal Poly SLO Final Exam Solutions 2004
Document Summary
This question asks you to apply the weitzman model of policy choice under uncertainty. You can get 5 points for either answer (elastic or inelastic) as long as you justify it. So2 demand is fairly elastic, because there are fairly good substitutes available for high-sulfur coal (e. g. , utilities can burn low-sulfur coal or switch to natural gas). When demand is elastic, standards perform better than taxes. Suppose true demand for so2 is given by dt. The regulator, not knowing this, is just as likely to overestimate pollution demand as d1 as to underestimate it as d2. If the regulator believes demand to be d1, she will set the pollution standard at x1: if the regulator believes pollution, both policies miss the mark. X2 demand to be d2, she will set the pollution standard at x2. Under a tax, if the regulator believes demand to be less than x*, while x1.
