Cap and trade, Couse theorem

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Agriculture + Resrce Econ
AREC 202
Christopher Goemans

5 October How can a drought in Russia raise the price of bread in the United States? Drought essentially raises the cost of production Wheat is an input to the production of bread Drought in Russia → price of bread goes up Be careful on tests: do not write that supply goes up when it shifts Cap and Trade Example 2 factories Emissions cause acid rain (- externality) Restrict emissions to 75% of emissions Each producer allowed 75 units of emissions (Cap) Easy for first factory to reduce emissions Factory 2 – difficult to reduce emissions Emissions credits are tradeable Factory 2 can buy credits from factory 1 and not reduce Couse Theorem If property rights are fully specified, the market will deal with externalities on its own 2 person example Watering grass Accidentally hit neighbor w/ spray Right to spray water
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