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Uncertain externality

The health and environmental damages associated with the production of GMO crops is uncertain. Without intervention, agricultural producers will adopt GMO crops (whether or not it is rational to do so). A regulator can choose to prohibit the use of GMO crops, in which case the benefits and costs would be 150 and 50, respectively. The increased yields associated with GMO production will lead to greater benefits of 200. The regulator has placed a subjective probability of 0.9 that the use of GMO products will only result in a small increase of costs (cost is 60) and 0.1 probability that their use will result in a catastrophe (cost is 400).

(a) What is the expected value of GMO production? What is the certain value of non-GMO production?

(b) Would a risk-neutral regulator intervene?

(c) Suppose that a social planner has the following utility function: U(W) = W^(1/2), where W is the total welfare experienced by society. He generates 200 units of welfare from activities not related to GMOs. What is his expected utility from GMO adoption? Prohibiting GMOs?

(d) Would the risk-averse planner prohibit the use of GMOs?

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Insha Fatima
Insha FatimaLv10
28 Sep 2019

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Related questions

Please read the article below and answer this question:

a) The article calls for public policy initiatives to address animal welfare and environmental concerns associated with dairy farming in Australia. With reference to economic concepts covered in this course, explain why the government might want to intervene in the dairy market.

View partners of The Conversation The Australian dairy farming industry are in a state of crisis. Cheap dairy products and fluctuations in both the domestic and global markets have taken a financial toll on farmers. Consumers have rallied to help struggling dairy producers. But this is only half the problem. The true cost of dairy is also paid by dairy cows and the environment. Welfare problems Despite the idyllic image of outdoor farming, several industry practices negatively affect dairy cows. To meet production demands, dairy cows are subject to a continuous cycle of impregnation, induced calving, and milking. Tail-docking and horn removal are routinely performed without pain relief. Lameness is another major animal welfare problem, often the result of environmental pressures, such as tracks, herd size, and handling. The average lifespan of a dairy cow is six to seven years, whereas generally, cows can live for 20 to 25 years. One of the most controversial issues is young bobby€ calves. A bobby calf is a newborn calf, less than 30 days old, who has been purposely separated from its mother. Immediately after separation, the cow and calf call out and search for each other. Most bobby calves are slaughtered within the first week of their life. Handling and transport pose added problems for young calves who have not developed herding behaviors, are vulnerable to stress, and are forced to go without their mother's milk. Each year, 450,000 bobby calves are slaughtered. Dairy farmers are being milked dry, but let's remember the real cost of milk May 25, 2016, 6.11 am AEST The dairy industry faces a number of welfare and environmental issues. Cow image from www.shutterstock.com Advocacy groups frequently uncover the routine abuse of bobby calves in Australian abattoirs and challenge the dairy industry to do something about it. Yet aside from the wider ethical questions over the use and exploitation of animals, farmers are not legally doing anything wrong. This is because the treatment of animals operates in a legal context where animals are considered absolute property. What's more, farm animals are exempt from the provisions of anti-cruelty legislation. Codes of practice are practically useless because they promote low welfare standards and are unenforceable. The environmental impact As well as systematic welfare problems, livestock farming is, both directly and indirectly, one of the most ecologically harmful human activities. The Australian livestock sector is worth A$17 billion and dairy cattle farming is a A$4.2 billion industry. In Australia, livestock farming accounts for 10% to 16% of greenhouse gas emissions, with dairy farms contributing 19% of this or 3% of total emissions. Methane emissions, from digestion and manure, and nitrous oxide from livestock are significant contributors. Globally, the livestock sector is responsible for more greenhouse gases than the world's transport. Livestock production accounts for 70% of all agricultural land, including the land used to grow crops to feed these animals. Animal agriculture is a key factor in land degradation, deforestation, water stress, pollution, and loss of biodiversity. Livestock farming will also be affected by climate change, particularly changes in temperature and water. The quantity and quality of pasture and forage crops will also be affected. Diseases may increase due to fluctuating weather and climate. Emissions can be reduced Just as the energy sector is attempting to transition to low-carbon energy sources to tackle climate change, the agricultural sector needs to transition to an ethical and sustainable alternative. From the current crisis, there are several opportunities for farmers to seize. Large transitions are possible in land use, production, output, and profitability. Places such as Gippsland in Victoria, which currently produces 19% of Australia's dairy, have the opportunity for agricultural development based on apples and brassicas, such as broccoli, kale, cauliflower, cabbage, turnip, and mustard. Some of these crops are already popular in the region. As a result of climate change and increasing temperatures, some areas will be more suitable than others. While still in the stages of research, perennial grain crops that store more carbon, maintain better soil and water quality, and manage nutrients better than annuals have the potential to contribute to sustainable agriculture. New land uses could also include carbon plantings, biofuels, and bioenergy crops. Investing in further research for alternatives to livestock farming is needed. Some have argued that livestock emissions can be technically mitigated by modifying animal feed, better managing pastures, carbon sequestration, and manure storage. Welfare issues remain But technical mitigation does not address the endemic animal welfare problems in the livestock industry. Consumer demand is one of the most powerful strategies to combat animal welfare and environmental problems. Research shows that we must reduce food waste and losses in the supply chain and change our diets toward less resource-intensive diets, such as plant-based diets. Doing so would cut emissions by two-thirds and save lives. It's possible to eliminate animal suffering and reduce carbon emissions by reducing and replacing livestock production and consumption. Alternatives to dairy milk include soy and almond milk. Soy milk is nutritionally comparable to dairy milk and has a significantly smaller environmental footprint. Policy initiatives also need to address these issues. The Food and Agriculture Organization's Livestock's Long Shadow report recommends a policy approach that correctly prices natural resources to reflect the full environmental costs and to end damaging subsidies. In the interim, higher taxes on meat and other livestock products will be necessary to improve public health and combat climate change. Denmark, for instance, is considering proposals to raise the tax on meat after its ethics council concluded that climate change is an ethical problem€. Governments everywhere need to have a transitional plan for livestock producers and workers - one that helps to cultivate the ethical and sustainable agricultural endeavors of the future.

home / study / business / economics / questions and answers / Question 1 Which Of The Following Is The Best Example ... Question: Question 1 Which of the following is the best exam... Bookmark Question 1 Which of the following is the best example of a positive externality? A car company lays off 10,000 employees in order to cut costs. An individual drives a large SUV, which increases the amount of greenhouse gases in the atmosphere. An individual smokes in a restaurant, which bothers other patrons. A child is vaccinated against a disease, which reduces the probability that other children will catch the disease. 4 points Question 2 As a result of a negative externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. As a result of a positive externality, the market equilibrium quantity is too ______ compared to the socially optimal quantity. high; high. low; low. high; low. low; high. 4 points Question 3 Based on the diagram below, the deadweight loss area associated with the market equilibrium equals: Week06_graph1.jpg $10 $50 $80 $1,000 4 points Question 4 A firm's accounting profit is given by total revenue: less implicit costs. less explicit costs. less economic profit. less implicit and explicit costs. 4 points Question 5 Suppose an activity has a private cost equal to $30 and a private benefit equal to $30. The associated social cost equals $35 and the social benefit equals $30. Which of the following statements is true about this activity? There is a negative externality associated with this activity but not a positive externality. There is a positive externality associated with this activity but not a negative externality. There is both a positive and a negative externality associated with this activity. There is neither a positive nor a negative externality associated with this activity. 4 points Question 6 The Coase Theorem implies that: the efficient level of an externality is generally zero. private individuals living in market economies should not be concerned with externalities. government intervention is not always needed to arrive at the efficient level of an externality. government laws are unnecessary. 4 points Question 7 An industry in which a small number of large firms sell products that are either close or perfect substitutes is: perfectly competitive. monopolistically competitive. an oligopoly. a monopoly. 4 points Question 8 When a negative externality is present in a market: a tax can increase the level of economic surplus. the social benefits are greater than the private benefits. there is generally too little of the good produced by private markets. the government should ensure that there are zero external costs associated in all markets. 4 points Question 9 In the presence of a positive externality, the government can arrive at the socially optimal output level by: paying producers a subsidy equal to the amount of social benefits associated with the activity. charging producers a tax equal to the amount of social costs associated with the activity. paying producers a subsidy equal to the amount of external benefits associated with the activity. charging producers a tax equal to the amount of external costs associated with the activity. 4 points Question 10 The tragedy of the commons is that: too few individuals have access to high quality healthcare. common people overconsume public goods. the quality of life for lower income people is generally lower than that of higher income people. a resource with no price tends to be exploited until its marginal benefit falls to zero. 4 points 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.

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 “Thank God I’m a Country Boy.” 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 ¼ 0.90 À 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 person’s use of it does not reduce another person’s 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 Cheetah’s 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 “nonsense”

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 − Q, and the marginal benefit to Jacob is 40 − 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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