b) Ana also reads that climate change is caused by carbon emissions from air travel. Two airlines run flights between two cities, Air A and Air B. The government has said that the airlines can produce 100 units of carbon emissions between them, under a carbon permit scheme, and should decide how to split the 100 units between them. Air A and Air B have the same operating costs and the same costs of reducing the amount of carbon that they produce per flight. Say Air A has been operating on the route for over 50 years and the government decides to give all the permits to Air A (based on its long use of the route). Air A offers a proportion R of the 100 units of permits to Air B and Air B can accept the offer or reject it and not fly on the route. • How will the other parameters of the model as discussed in this module affect the value of R* at which Air B accepts the offer? • Say that the government gives the permits to Air A for 5 years, and will gives them to Air B for years 6 to 10. So after 5 years, Air B can decide how they should be allocated between the airlines. How does this kind of setup affect the offers that will be made and whether those offers will be accepted?
Part B C D needed
b) Ana also reads that climate change is caused by carbon emissions from air travel. Two
airlines run flights between two cities, Air A and Air B. The government has said that
the airlines can produce 100 units of carbon emissions between them, under a carbon
permit scheme, and should decide how to split the 100 units between them. Air A and
Air B have the same operating costs and the same costs of reducing the amount of carbon
that they produce per flight.
Say Air A has been operating on the route for over 50 years and the government decides to give
all the permits to Air A (based on its long use of the route). Air A offers a proportion R of the
100 units of permits to Air B and Air B can accept the offer or reject it and not fly on the route.
• How will the other parameters of the model as discussed in this module affect the value
of R* at which Air B accepts the offer?
• Say that the government gives the permits to Air A for 5 years, and will gives them to
Air B for years 6 to 10. So after 5 years, Air B can decide how they should be allocated
between the airlines. How does this kind of setup affect the offers that will be made and
whether those offers will be accepted?
c) Tackling climate change, a global problem, requires international agreements and successful
implementation of those agreements. Explain, using examples from Climate Change
Agreements since Kyoto 1997 and your knowledge of strategic interactions over time, why
global agreements are difficult to implement in practice. Referring to the game you have
used, make one recommendation on how you think the game could be changed so as to
predict an increase in the chances of agreements being implemented. Make sure to include
any appropriate equations or graphical analysis and independent research as relevant.
d)
Consider an economy (call it country G) that is implementing climate change legislation
more rapidly than other countries (refer to them as ‘row’ for ‘rest of the world’). Explain how
this decision by country G could affect its long-run markup. Using diagrams, explain your
new equilibrium. In the light of your findings, what advice would you give to a policy maker
in G?
e)A government announces a green budget where they will provide zero interest loans for
private sector investment in green electricity production, spend on government investment in
rail transport and increase value added tax on all consumer goods with a high carbon
footprint. Use the multiplier model (diagram and equations) to explain the likely effect on
aggregate demand in the economy. Assume ceteris paribus. In your answer explain how you
are interpreting ‘cet. par.’ when discussing the predictions of the multiplier model.
f)
Now, suppose the economy in which the policies in parts (D) and (E) were implemented was
initially in equilibrium (i.e. with zero net entry and constant inflation). It has an inflationtargeting central bank. How would you expect the central bank to respond to the
implementation of these policies? Use a diagram to help you explain this using the concepts
of the WS/PS model, AD
(Do not explain how the economy would react to the central bank’s behaviour.) Would
consideration of the central bank’s reaction lead you to alter the advice you offered the policy
maker in (D)? Assume that you cannot interfere with the central bank
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