ECON 2J03 Lecture 6: Chapter 6 part 2

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15 Mar 2018

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Net benefits from reducing emissions from e=15 to e=10 are a+d. If the target of the project is to reduce emissions to 12 tonnes, the net social benefits are only area a. Comparing benefits and costs: compute the net benefits (nb) of the project or program. If the project lasts more than one year we need to discount any future costs and benefits when computing net benefits. If there is more than one project that can achieve the same target or goal, we select the project that has the largest net benefits.

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PART A

1. In which of the following situations is the Coase theorem likely to apply? Explain.

a. The neighbor who lives below you in the apartment building loves to play old John Denver records at loud volume early in the morning. In fact, his favorite song seems to be âThank God Iâm a Country Boy.â You hate old John Denver songs and this one in particular.

b. You have just moved to Beijing and quickly discover that you are allergic to smog. It causes you great pain in breathing and limits your ability to work. Furthermore, you have medical expenses related to treatment for its health effects on you.

c. Medical research in the 1990s has revealed a specific cause of birth defects related to a certain drug prescribed for pregnant women in the 1960s (thalidomide).

d. The water in the huge underground Ogalalla aquifer in the Great Plains region of the United States is being nitrate contaminated due to agricultural fertilizer use throughout the region. As a homeowner in this region, you find that your water must be treated in order to be safe for drinking.

2. One of the most striking aspects of cities in the former Soviet Union is the poor condition of public places. Streets, parks, libraries, museums, concert halls, and public gathering places of every description are all in very poor condition, revealing years of neglect and lack of maintenance.

Explain this phenomenon in light of the definition of property rights and the transition from socialism to a market economy.

3. Suppose that the marginal benefit associated with corn production is MB = 2.5. The marginal private cost of production is MPC = 2 + 0.1Q, where Q measures bushels of corn produced in thousands. The marginal damages caused by pollution in corn production are given by MD = 0.05Q.

a. Compute the privately optimal output and the socially optimal output.

b. Compute new solutions for an increase in MB to MB = 3. Explain what has happened and why. c. Demonstrate the effects of an increase in MD to MD = 0.075 compared to the solutions in part a.

4. Policy analysts in the Department of Natural Resources have estimated that the marginal benefits from water pollution abatement are given by the function MB Â¼ 0.90 Ã 0.03A, where A is a measure of the abatement intensity. Industry experts have estimated that the marginal cost of abatement activity is MC = 0.30 + 0.09A.

a. Determine the optimal level of abatement activity.

b. Explain what happens when new technology reduces the marginal cost of abatement to MC = 0.25 + 0.06A. 5. Consider the pollution reduction mechanism known as emissions trading. a. What is the economic rationale for permitting emissions trading?

b. If the objective is to minimize the cost of emissions reductions, explain what economic principle should be followed in allocating emissions reductions between two countries.

c. Suppose the marginal cost curves for emissions reductions in countries A and B are MCA = 10 + 0.04qA and MCB = 5 + 0.02qB. What is the most efficient allocation of an emission reduction of q0 between the two countries? (Assume that the emissions reductions of the two countries must add up to the total emissions reduction: q0 = qA = qB.)

PART B

1. Which of the following do you consider pure public goods? Private goods? Why?

a. Wilderness areas

b. Satellite television

c. Medical school education

d. Public television programs

e. Automated teller machine (ATM)

2. Indicate whether each of the following statements is true, false, or uncertain, and justify your answer.

a. Efficient provision of a public good occurs at the level at which each member of society places the same value on the last unit.

b. If a good is nonrival and excludable, it will never be produced by the private sector.

c. A road is nonrival because one personâs use of it does not reduce another personâs use of it.

d. Larger communities tend to consume greater quantities of a nonrival good than smaller communities.

3. Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and currently spends 6 hours patrolling, 8 hours picking, and 10 hours sleeping.

a. What are the public and private goods in this example?

b. If Tarzan and Jane are each currently willing to give up one hour of patrol for 2 pounds of fruit, is the current allocation of Cheetahâs time Pareto efficient? Should he patrol more or less?

4. The aircraft company Airbus receives much of its funding from European governments. Airbus recently decided to build a new 550-seat mega-jetliner, with duty-free shopping courts and restaurants on board. The project has experienced production delays as well as cost overruns, and it now appears that there will be very few buyers. An industry expert says the idea from the start was ânonsenseâ

Is public sector production of aircrafts ever justified?

Explain why it could lead to the apparently ill-advised decision to build the mega-jetliner.

5. Suppose that there are only two fishermen, Zach and Jacob, who fish along a certain coast. They would each benefit if lighthouses were built along the coast where they fish. The marginal cost of building each additional lighthouse is $100. The marginal benefit to Zach of each additional lighthouse is 90 â Q, and the marginal benefit to Jacob is 40 â Q, where Q equals the number of lighthouses.

a. Explain why we might not expect to find the efficient number of lighthouses along this coast.

b. What is the efficient number of lighthouses? What would be the net benefits to Zach and Jacob if the efficient number were provided?

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Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy. 4 points Question 15 Based on the diagram below, if the costs of hospital care are constant at $200 per day, and the individual does not incur any cost for each day for hospital care, then: the individual will stay 7 days and there will be no loss in economic surplus. the individual will stay 3 days and there will be no loss in economic surplus. the individual will stay 7 days and there will be lost economic surplus. the individual will stay 3 days and there will be lost economic surplus. 4 points Question 16 Economic research by Manning and colleagues suggests that people with deductible health insurance policies: spend substantially less on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially more on health care and have substantially better health outcomes compared to people with first-dollar insurance coverage. spend basically the same amount on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially less on health care and have no measurable difference in health outcomes compared to people with first-dollar insurance coverage. 4 points Question 17 An efficient program for reducing pollution is one for which: all polluters incur the same total costs of abatement. all polluters pay the same amount in taxes to the government. all polluters have the same marginal costs of abatement. all polluters reduce their emissions by the same amount. 4 points Question 18 Given the information on pollution abatement costs of the two firms shown below, which of the following is an efficient combination of pollution reduction? Quantity of pollution abatement Firm A's MC of abatement Firm B's MC of abatement 1 $30 $25 2 $35 $30 3 $40 $35 4 $45 $40 Firm A reduces by 1 ton and Firm B reduces by 1 ton. Firm A reduces by 2 tons and Firm B reduces by 3 tons. Firm A reduces by 4 tons and Firm B reduces by 1 ton. Firm A reduces by 3 tons and Firm B reduces by 2 tons. 4 points Question 19 All of the following are characteristics of perfectly competitive markets except: there are a large number of firms. productive resources are mobile. all firms produce a differentiated product. buyers and sellers are well informed. 4 points Question 20 An advantage of the auction method to pollution abatement is that: it is very expensive to firms. regulators can achieve a desired abatement target without having detailed knowledge of the abatement technologies available to polluters. it requires all firms to reduce by exactly the same amount. it assures that eventually society will reach a level of zero pollution emissions. 4 points Question 21 There are 2 firms each emitting 200 tons of a pollutant. Firm A's abatement costs are constant at $20/ton, and Firm B's abatement costs are constant at $40/ton. The government's goal is to reduce pollution by half. If the government auctions 200 one ton permits to the highest bidder: Firm A will purchase all 200 permits. Firm B will purchase all 200 permits. each firm will buy 100 tons. there is no way to know who the highest bidder for any permit would equal. 4 points Question 22 As a result of economies of scale, as output expands: fixed costs are decreasing. average total costs are decreasing. marginal costs are increasing. total costs are decreasing. 4 points Question 23 Generally, when countries open their borders to free trade: both domestic producers and consumers of imported goods gain. both domestic producers and consumers of exported goods gain. domestic producers of imported goods and domestic consumers of exported goods gain. domestic producers of exported goods and domestic consumers of imported goods gain. 4 points Question 24 Which of the following is the best example of a tariff? South Korea bans imports of U.S. beef because of safety concerns. The U.S. requires toys imported from China to undergo testing for lead content. The U.S. imposes a tax on sugar imported from Brazil. The U.S. restricts the quantity of cars imported from Japan. 4 points Question 25 A means-tested program is a benefit program: in which benefits decline as a recipient's earned income increases. in which all individuals must undergo health screening to be eligible for benefits. in which all recipients exclusively receive benefits through in-kind transfers. that only affects the average income of a specific segment of the population. 4 points Save and Submit Click Save and Submit to save and submit. Click Save All Answers to save all answers.

1. Which of the following is an example of the source function of the environment?

A. Trees absorb some of the carbon dioxide emitted by human activity

B. Wetlands reduce the pollution levels in water

C. Winds carry air pollution away from a city

D. Humans harvest fish from the oceans

E. Bacteria break down discarded wastes

2. What is the primary external input into the broader ecological circular flow model?

A. Pollution

B. Solar energy

C. Fossil fuels

D. Geophysical cycles

E. Factors of production

3. What is the key reason that Malthusian predictions have not come true so far?

A. Increasing productivity per capita

B. Increasing population

C. Increasing natural capital

D. Increasing population density

E. Definition of property rights

4. Which one of the following statements is true regarding the rate of global population growth over the last 40 years?

A. Population has grown at a faster rate than agricultural production and energy use

B. Population has grown faster than energy use but not agricultural production

C. Population has grown faster than agricultural production but not energy use

D. Population, energy use, and agricultural production have all grown at about the same rate

E. Population has grown at a slower rate than agricultural production and energy use

5. Which one of the following is not a possible way to internalize externalities?

A. Eliminate government intervention

B. Raise taxes

C. Create subsidies

D. Create a system of tradable permits

E. Create new regulations

6. The efficient price of a license fee is determined by the difference between ...

A. Marginal revenue and marginal cost

B. Average revenue and marginal cost

C. Total revenue and total cost

D. Average revenue and total cost

E. Total revenue and marginal cost

7. Valuing environmental services based on estimating the value of different characteristics of market goods is called ...

A. Travel cost method

B. Contingent valuation

C. Hedonic pricing

D. Production function valuation

E. Avoided cost valuation

8. Which one of the following statements about national accounting is false?

A. Gross National Product does not account for natural capital depreciation

B. Net investment is gross investment minus depreciation

C. Capital depreciation accounts for wearing-out of human-made capital over time

D. A negative net investment implies a decline in national wealth

E. Net National Product does not account for capital depreciation

9. User costs will be incorporated into a market if ...

A. Interest rates are positive

B. Discount rates are zero

C. Resource owners foresee future shortages

D. Government intervention is eliminated

E. Discount rates are positive

10. Hotellingâs rule states that...

A. The net price of a resource is constant

B. The net price of a resource rises at a rate equal to the interest rate

C. The net price of a resource declines at a rate equal to the interest rate

D. The price of a resource depends on the allocation of property rights

E. The price of a resource is efficient as long as all user costs are internalized

11. Transferable permits are likely to result in less inefficiency, relative to a pollution tax, when...

A. The marginal costs of damage are steep and the marginal costs of pollution reduction are relatively stable

B. The marginal costs of damage are steep and the marginal costs of pollution reduction are steep

C. The marginal costs of damage are relatively stable and the marginal costs of pollution reduction are relatively stable

D. The marginal costs of damage are relatively stable and the marginal costs of pollution reduction are steep

E. The marginal costs of damage are elastic and the marginal costs of pollution reduction are also elastic

12. Which one of the following statements is false regarding a transferable pollution permit system?

A. Each firm will operate in an economically efficient manner

B. Total pollution levels in a region can be set by the government

C. The price of a permit will vary with changes in technology

D. The system is preferable to a pollution tax in all situations

E. Social benefits can be maximized

13. If a large percentage of people in a country are young, this is a sign that ...

A. The country has significant population momentum

B. The country is in the first stage of the demographic transition

C. The countryâs population will shortly stabilize

D. The countryâs population is declining

E. The country is in the last stage of the demographic transition

14. Which one of the following statements about the demographic transition theory is false?

A. Population levels are relatively stable in the first and last stages of the demographic transition

B. The demographic transition theory states that death rates will decrease before birth rates decrease

C. Many industrial countries have entered the third or fourth stage of the demographic transition

D. The demographic transition process has occurred at very different rates in different parts of the world

E. The demographic transition theory suggests that continued exponential population growth is possible with constant economic growth

15. Which one of the following policies would not reduce water use?

A. Full marginal-cost pricing

B. Microirrigation technology

C. Reusing wastewater for industrial uses

D. Subsidizing irrigation systems

E. Removing water subsidies

16. Which one of the following statements is false?

A. Carbon dioxide is a stock pollutant

B. Without the natural greenhouse effect, life could exist on earth

C. The atmosphere is an example of a global commons

D. Global carbon dioxide concentrations in the atmosphere have increased since the Industrial Revolution

E. Global climate change results from ozone layer depletion

17. Which one of the following statements regarding carbon taxes is false?

A. Carbon taxes would have the most impact on coal prices

B. Carbon taxes would reduce negative environmental externalities

C. Carbon taxes would not set the exact level of carbon emissions

D. The effect of a carbon tax depends on the elasticity of demand for fossil fuels

E. A revenue-neutral carbon tax implies an increase in income taxes and/or other taxes

18. The elasticity of demand for carbon-based fuel sources is ...

A. Low in the short term but higher in the long term

B. High in the short term but lower in the long term

C. High in both the long and short term

D. Low in both the long and short term

E. Zero in the short term and positive in the long term

19. Which one of the following statements is false?

A. The World Bank currently screens all projects for potential environmental impacts.

B. World Bank loans are often coupled with grants from other organizations

C. World Bank funding for environmental projects has steadily increased since 1994

D. World Bank projects include both a âbrownâ and a âgreenâ agenda

E. World Bank loans must eventually be repaid

20. Which one of the following statements is true?

A. Strong sustainability assumes that most resources can be substituted for one another

B. Strong sustainability is easier to achieve that weak sustainability

C. Instituting strong sustainability would require extensive government intervention in markets

D. Strong sustainability is supported by traditional economic theory

E. Strong sustainability dictates that no non-renewable resources be used

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ECON 2J03 Lecture 6: Chapter 6 part 2

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