Solution to seminar 6 (please read msg)

I posted my suggested solution to seminar 6.

Unfortunately, I said something wrong in class, regarding problem 2 (c): I said that the tax will not affect the level of y. This is of course not correct. However, an increase in the tax will not change y as much as an increase in the subsidy will, for the same distortion to x. Alternatively: to reach the same level of y as with a subsidy, the tax will induce a larger distortion to the level of x.

If the benefit from learning by doing is high enough relative to the damages from pollution, we want a big increase in y, without decreasing x too much. The subsidy is best for that purpose. The RPS is best for some intermediate range of benefits from learning by doing.

Eivind