Economics 3220 Lecture : Chapter 5- Pt 2.docx

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5 Feb 2013

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Total cost of achieving a emission reduction target is minimized if marginal abatement costs are equalized for all firms/emitters: consider two firms: Firm 1: emissions are read from left to right. Reductions are read from right to left. Firm 2: emissions are read from right to left. Reductions are read from left to right. Step 1: find vertical and horizontal intercepts of the two mac curves. Step 2: draw mac1 showing mac values on the y-axis and its emissions on the x-axis so: firm 1"s emission will be read from left to right, reduction will be right to left. Step 3:draw a second vertical axis er units apart, er being the emission reduction target. Step 4: draw mac2 on the second vertical axis showing its emission from right to left so firm 2"s reduction will be read from left to right. Step 5: find the intersection of the 2 mac"s where mac1=mac2. This will give efficient abatement e1* and e2*

Related Questions

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.

8. Two methods of reducing pollution

Suppose the government wants to reduce the total pollution emitted by three firms in its area. Currently, each firm is creating 4 units of pollution in the area, for a total of 12 pollution units. The government wants to reduce total pollution in the area to 6 units, In order to do so,it can choose between the following two methods:


1.	The government sets pollution standards (Method 1)
2.	The government allocates tradable pollution permits. (Method 2)

compare the two methods to determine the least-cost way of achieving the desired pollution quantity.

Eliminating pollution can be more difficult(and thus more costly) for some kinds of firms than for others. The following table shows the cost of elimanating each unit of pollution for each of the three firms.


	Firm X	Firm y	Firm z

Cost of elimination the first unit of pollution	$650	$55	$90
Cost of elimination the 2nd unit of pollution	$800	$70	$125
Cost of elimination the 3rd unit of pollution	$1,500	$110	$180
Cost of elimination the 4th unit of pollution	$10,500	$550	$1080

Under Method 1, the government sets pollution standards so that each firm must reduce its polluton by 2 units. Fill in the following table with the total cost to each firm of reducing its pollution by this amount

Total cost of eliminating 2 units of pollution	FIRM X	FIRM Y	FIRM Z

Adding up the costs to the three firms, you can see that the total cost of eliminating 6 units of pollution through regulatory standard is _________
$1645
$1790
$2,785
$1,490
Now suppose the government uses method 2 to reduce pollution in the area from 12 units to 6 units by issuing two pollution permits to each firm. For each permit a firm has in its possession, it can emit 1 unit of pollution, but firms are also free to trade pollution permits with one another. For example, if firm X were to buy a permit form firm Y, firm X would end up with three permits and would need to reduce its pollution by only1 unit, whereas firmY would end up with only one permit and would have to reduce its pollution by 3 units. Assume the negotiation and exchange of permits are costless

Because of its high pollution-reduction costs, firm X might be better off buying permits form firm Y and firm Z so that it doesn't have to reduce its own pollution emissions. At which of the following prices are both firm y and firmz willing to sell one of their permits to firm X? check all that apply

- $390
-$155
-$415
-$70
Again , suppose that you are considering the method of pollution reduction involving trabable permits. Suppose the owners of the three firms get together and agree on a trading price of $420 per permit. Fill in the following table with the action taken by each firm, the amount each firm will pollute, and the amount it costs each firm to reduce pollution to the necessary level. (Hint: do not include the prices of permits in the cost of reducing pollution)

	FIRM X	FIRM Y	FIRM Z
Initial pollution permit allocation	2 units	2 units	2 ;units
action
Final pollution amount

Given this senario, rthe total cost of eliminating 6 units of pollution using a tradable permit is _______
$0
$1,470
$1,100
$630
On the basis of this example, you can conclude that eliminating pollution is ________ costly to society when
more
less
the government allocates pollution permits that can be bought and sold than when it directs each firm to eliminate a certain amount of pollution.

Blank under method one

FIRM X	FIRM Y	FIRM Z
	$800	$125	$305
choose the right answer	$2,300	$70	$215
	$2,150	$165	$125
	$1450	$180	$270

Blanks under tradable permits

	FIRM X	FIRM Y	FIRM Z
Initial pollution permit allocation	2 units	2 units	2 ;units
action	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit	buy 1 permit sell 2 permit don't buy/sell sell 1 permit buy 2 permit
Final pollution amount	1 unit 2 units 3 units 4 units	1 unit 2 units 3 units 4 units	1 unit 2 units 3 units 4 units
Cost of polluton reduction	$650 $0 $1,450 $800	$0 $70 $125 $235	$125 $215 $395 $0

Economics 3220 Lecture : Chapter 5- Pt 2.docx

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