Homework 1

Externalities; EPA Edangerment Finding on GHG Emissions; Coase Theorem

Homework Instructions

• No Generative AI: You are not allowed to use generative AI tools for Homework Assignment 1.

• Deadlines:

  • Questions 1, 3, and 4: Due Monday, September 22, 2025 at 10:30 A.M. (ET)
    • Hand in your written answers on paper to Prof. Choe at the beginning of class.
      
  • Question 2: Due Monday, September 22, 2025 at 11:59 P.M. (ET)
    • Submit your comment as a PDF or Word document on Brightspace.
      
    • When uploading, please also leave a note in the submission box indicating whether you submitted your comment to the U.S. EPA.

Question 1. Externalities and Economic Development (Points: 30)

The demand function for oil is \(q_d = 4 - p\), and the supply function is \(q_s = p - 2\), where \(p\) is the price of oil per barrel, and \(q\) is the quantity of oil in millions of barrels per day. Using this information, solve the following problems:

---

a. Graph the supply and demand functions on the same coordinate plane.

b. Determine the market equilibrium price and quantity of oil.

c. Calculate the consumer surplus and producer surplus at the market equilibrium.

d. Oil consumption causes environmental damage. Suppose the external marginal cost of oil pollution is given by \(EMC = q + 1\). Calculate: (1) The socially optimal level of oil use (2) The deadweight loss due to pollution at the market equilibrium

e. Due to economic development, the future demand for oil increases, resulting in a new demand function \(q_d' = 8 - p\). Determine: (1) The new market equilibrium price and quantity (2) The new socially optimal level of oil use (2) The deadweight loss due to pollution at the market equilibrium in the future

f. Propose and briefly explain two distinct public policies that could be implemented to mitigate the environmental damages and reduce the burden on future generations. Discuss the potential effectiveness and challenges of each policy.

g. Suppose the government decides to impose a Pigouvian tax to internalize the external costs of oil pollution. Calculate the optimal tax rates in the present and in the future and explain how it would affect the market equilibrium and social welfare.

Question 2. EPA Endangerment Finding on Greenhouse Gas Emissions (Points: 40)

You have an opportunity to comment and voice your opinions on the US Environmental Protection Agency’s proposal to rescind its endangerment finding and end federal regulation of greenhouse gas emissions. Public comments on the proposal are invited and should be submitted no later than 11:59 PM EDT on Monday, September 22, 2025.

Homework Submission

• For grading purposes, please submit a PDF of your comment to Brightspace by 11:59 PM EDT on Monday, September 22, 2025.

• You are not required to submit your comment to the US EPA for grading. However, I strongly encourage you to take this opportunity to learn more about an important policy issue, practice your reasoning and argumentation skills, and engage in civic responsibility.

How to Submit Comments to the US EPA

You can submit comments online or by email. The deadline for Submitting Comments is 11:59 PM EDT on Monday, September 22, 2025.

Commenting online:

• EPA prefers that comments be submitted online using the Federal eRulemaking Portal.
• Click this link for commenting on the EPA proposal, Docket ID No. EPA-HQ-OAR-2025-0194.
• Click the tab “Docket Documents.”
• Click the “Comment” button.
• Type or paste your comment in the comment field OR attach a file with your comment.

Commenting by Email:

• Type the Docket ID No. in the subject line of your email message: EPA-HQ-OAR-2025-0194
• Send your email to a-and-r-Docket@epa.gov.

Writing Effective Comments

Begin by informing yourself about EPA’s proposal, their analysis, and the analyses of others using links provided below. Search for additional credible sources.

Effective comments are concise and strongly reasoned. Recission of the endangerment finding will have many far-reaching consequences. Don’t attempt to be comprehensive in your comments; focus on one or two issues that are most salient to you. Support your comments with citations to sources if relevant. Include a statement about why the proposed recission is important to you personally. See also EPA’s tips for effective comments on rulemaking dockets

Draft your comments using MS Word or similar program. This makes it easier for you to make and save revisions before you submit your comments.

The Main Issue: EPA’s Proposal to Reconsider the 2009 Endangerment Finding

Background

• 2009 Endangerment Finding: The EPA determined that greenhouse gases (GHGs) endanger public health and welfare, and that emissions from new motor vehicles contribute to this threat.
  
• Legal Foundation: This finding triggered the EPA’s obligation under Clean Air Act (CAA) §202(a) to regulate GHG emissions from cars and trucks.
  
• Supreme Court Ruling: In Massachusetts v. EPA (2007), the Court confirmed that GHGs are “air pollutants” under the Clean Air Act.

The Current Proposal (2025)

• EPA proposes to rescind the 2009 Endangerment Finding.
• This would remove the statutory basis for regulating GHG emissions from new vehicles under CAA §202(a).
• As a result, all GHG standards for light-, medium-, and heavy-duty vehicles would be repealed.

The Main Issue

Should GHGs be treated as “air pollution” under CAA §202(a), requiring EPA regulation, or not?

• Pro-Regulation View:
  • GHGs clearly fit the Act’s definition of “air pollutant.”
  • Vehicle emissions are a significant source of U.S. GHGs (~17% of total).
  • Regulation delivers real emission cuts and large net economic benefits (fuel + maintenance savings, health co-benefits).
• Repeal View:
  • Section 202(a) was not intended for global pollutants like CO₂.
  • Vehicle standards have only a modest impact on global concentrations and warming.
  • Compliance raises vehicle costs and limits consumer choice, creating economic harm.

Learn about EPA’s Proposal

• EPA Proposed Rule: Reconsideration of Endangerment Finding and Greenhouse Gas Vehicle Standards
• EPA Notice of Proposed Rulemaking
• EPA Draft Regulatory Impact Analysis

Resources related to the Proposal

• A Critical Review of Impacts of Greenhouse Gas Emissions on the U.S. Climate, US Department of Energy, Climate Working Group, Jul 23, 2025.

• The Practice and Assessment of Science: Five Foundational Flaws in the Department of Energy’s 2025 Climate Report, Executive Committee of the American Meteorological Society, Aug 27, 2025.

• Tandon, A., L. Hickman, C. Keating, and R. McSweeney, Factcheck: Trump’s climate report includes more than 100 false or misleading claims, Carbon Brief, Aug 13, 2025.

• Citizens’ Climate Lobby, Comment on Reconsideration of 2009 Endangerment Finding and Greenhouse Gas Vehicle Standards, Aug 8, 2025.

• Patterson S. and Niiler E., Trump Administration Aims to Roll Back Bedrock Climate Tool, The Wall Street Journal, July 29, 2025.

• Wentz, J., Attribution Science and EPA’s Reconsideration of the GHG Endangerment Finding, Climate Law Blog, Columbia Law School, May 22, 2025.

• EPA Launches Biggest Deregulatory Action in U.S. History, US EPA, March 12, 2025.

Question 3. Coase Theorem (Points: 30)

A small town has two factories, Alpha and Beta, located side by side. Alpha emits smoke that drifts into Beta’s building, making it harder for Beta’s workers to breathe and lowering their productivity. Currently, Alpha produces 12 units of smoke per day. Cutting back on emissions is costly:

Let \(x\) denote the units of emission reduced by Alpha (abatement). Treat \(x\) as any number from 0 to 12.

• Alpha’s marginal cost of reducing each unit of smoke is: \(MC = x\) (in $).
  
• Beta’s marginal benefit from each unit of reduction (cleaner air, healthier workers, higher productivity) is: \(MB = 12 − x\) (in $).

Two technological solutions are available:

• Beta can pay $10 per day to rent an air filter from a third party, which reduces Alpha’s smoke and improves the air quality in Beta’s workplace.
• Alpha can be relocated to another industrial site at a cost of $40 per day, which eliminates all exposure for Beta.

---

a. Draw a diagram with “units of emission reduced” on the horizontal axis, showing marginal costs and marginal benefits. Without the filter or relocation, what is the efficient amount of smoke Alpha should cut?

b. Suppose the air filter is installed, reducing Beta’s marginal benefit from each unit of abatement to \(\left(6 - \tfrac{x}{2}\right)\). That is, Beta now values emission reduction at only half the original level. What is the new efficient level of emission reduction?

c. Calculate the net benefit (efficiency) of Beta for each scenario:

    1. Do not rent the air filter or relocate Alpha, but instead pay Alpha not to emit smoke.
    2. Rent the air filter and then also pay Alpha not to emit smoke.
    (*Hint: There are two benefits under this scenario—(1) Relative to the status quo of 12 smoke emissions, the benefits of air filter rental have two components. First, Beta gets the full benefits of seeing 4 smoke reduced. Second, each unit of damage to Beta is cut in half by the filter for the remaining 8 smoke emissions.)
    3. Pay to relocate Alpha.

    Which scenario yields the highest efficiency? Show your calculations.

🔎 Guidelines:
- The net benefit (efficiency) is:
\[ (\text{Total Benefits from reduction}) \; - \; (\text{Total Costs (abatement + filter/relocation)}) \]

d. Assume no transaction costs or free riding. According to the Coase theorem, explain why the two factories could reach the efficient outcome through negotiation even if Beta has the right to force Alpha to move at its own expense.

Question 4. Class Participation (Not Graded for Homework 1)

Please write one sentence for each time you participated in class (any public speaking during class time) between August 25, 2025 and September 19, 2025.

Examples:
- “I asked a question to clarify the syllabus.”
- “I asked how carbon taxes affect consumer behavior.”
- “I gave plastic pollution as an example of a negative externality.”
- “I pointed out a calculation error during the lecture.”