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Consider a city that imposes a new pollution tax that increases the average cost (and price) of the good produced by a polluting industry by 4 percent and improves the city’s environmental quality by 20 percent. The price elasticity of demand for the city’s export goods is -1.50. a. The total output of the polluting industry will decrease by ____ percent, computed as. . . . b. The city’s equilibrium wage will [increase, decrease] because. . . . c. The city’s equilibrium employment will increase if the elasticity of the supply of labor with respect to environmental quality is relatively [large, small]. d. Use a supply-demand graph of the urban labor market to illustrate your answer to (c ) .

Chapter 5, Problem 8

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QUESTION:

Effects of Environmental Policy

Consider a city that imposes a new pollution tax that increases the average cost (and price) of the good produced by a polluting industry by 4 percent and improves the city’s environmental quality by 20 percent. The price elasticity of demand for the city’s export goods is -1.50.

a. The total output of the polluting industry will decrease by ____ percent, computed as. . . .

b. The city’s equilibrium wage will [increase, decrease] because. . . .

c. The city’s equilibrium employment will increase if the elasticity of the supply of labor with respect to environmental quality is relatively [large, small].

d. Use a supply-demand graph of the urban labor market to illustrate your answer to (c) .

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QUESTION:

Effects of Environmental Policy

Consider a city that imposes a new pollution tax that increases the average cost (and price) of the good produced by a polluting industry by 4 percent and improves the city’s environmental quality by 20 percent. The price elasticity of demand for the city’s export goods is -1.50.

a. The total output of the polluting industry will decrease by ____ percent, computed as. . . .

b. The city’s equilibrium wage will [increase, decrease] because. . . .

c. The city’s equilibrium employment will increase if the elasticity of the supply of labor with respect to environmental quality is relatively [large, small].

d. Use a supply-demand graph of the urban labor market to illustrate your answer to (c) .

ANSWER:

Step 1 of 4

a.

When the city imposes the new pollution tax that increases the average cost (and price) of the good produced by a polluting industry by 4 percent and improves the city’s environmental quality by 20 percent. The price elasticity of demand for the city’s export goods is -1.50. a. The total output of the polluting industry will decrease by 6 percent, computed as 4 % X 1.5 = 6 %.

Thus, the total output of the polluting industry will decrease by 6%.

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