ECON-1006EL Study Guide - Final Guide: Marginal Utility, Marginal Cost, Allocative Efficiency

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oliveferret196

26 Jun 2018

School

Laurentian

Department

Economics / Science Èconomique

Course

ECON-1006EL

Professor

Eastman

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Melaina Tucker

Dr. Byron Eastman

ECON 1006

April 4, 2018

Optimal Level of Pollution

Pollution can be described as contamination to air, land, and/or water by harmful

substances. In economics, there is an optimal level of pollution, and surprisingly that number is

not zero. It would not be allocative efficient to eliminate all pollution, meaning not every good

or service would be produced where the last unit provides a marginal benefit that is equal to

the marginal cost of producing to its consumers. In graph, rather than showing the total

amount of pollution produced, the amount of pollution abatement is shown. Pollution

abatement is the reduction of pollution by advanced equipment and technology. Therefore, the

graph will show a positive relationship; with the increased dollars spent, the more pollution

abatement, which means the less overall pollution.

The optimal level of pollution abatement is described when the marginal cost of

reducing pollution is equal to the marginal benefits of reducing pollution. The marginal benefit

is the additional benefit that arises from a one unit increase in an activity and the marginal cost

is the additional cost that arises from producing one additional unit. The marginal cost of

reducing pollution is small at low levels of lessening, but after a certain point it rises rapidly. The

reasoning behind the behavior of the gradually increasing curve is due to increasing marginal

costs and the degree of difficulty for different firms. Smaller steps to reduce pollution will be

less costly and newer firms typically were built environmentally friendly, therefore will cost

these firms less. The marginal benefit of abating is a downward sloping curve, showing the

demand for abatement while reflecting the marginal benefit of pollution abatement. The

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Document Summary

Pollution can be described as contamination to air, land, and/or water by harmful substances. In economics, there is an optimal level of pollution, and surprisingly that number is not zero. It would not be allocative efficient to eliminate all pollution, meaning not every good or service would be produced where the last unit provides a marginal benefit that is equal to the marginal cost of producing to its consumers. In graph, rather than showing the total amount of pollution produced, the amount of pollution abatement is shown. Pollution abatement is the reduction of pollution by advanced equipment and technology. Therefore, the graph will show a positive relationship; with the increased dollars spent, the more pollution abatement, which means the less overall pollution. The optimal level of pollution abatement is described when the marginal cost of reducing pollution is equal to the marginal benefits of reducing pollution.

Related Questions

#1)

The graph below shows the marginal social benefit and marginal social cost of pollution.

A) Imagine a place like La Grande with relatively clean air. If a new regulation called for everyone to drive electric cars in order to reduce pollution, is that more likely to result in a quantity of pollution like Q1 or Q3? Please explain.

B) Would the dollar amount of the Pigovian tax necessary to make this market operate efficiently be $10, $40, $50, $60, or $100?

#2)

The graphs below show the MB of pollution curves for two firms.

A. In the absence of government intervention, how much would each of these firms pollute?

B. If firm 1 and firm 2 were each given 100 tradable permits to emit pollution (each permit allowing one unit of pollution), what would the resulting amount of pollution reduction be for both firms together? In other words, the reduction from firm 1 plus the reduction from firm 2.

C. If these firms faced a tax on pollution equal to $50 per unit of pollution, which firm would reduce pollution the most?

#3)

The graph below depicts the challenge of managing a common property resource. Based on this graph what is the efficient (optimal) price and quantity?

#4)

Why isn't the optimal level of pollution zero and what is the optimal level of pollution?

GRAPHS-SEE IMAGE LINKS BELOW

#1) http://imgur.com/Aj4xvuy

#2) http://imgur.com/wLsdOJj

#3) http://imgur.com/gthFTOC

Consider the problem of carbon dioxide emissions. We will abstract from the complexity of the problem slightly, assuming there are polluters and consumers in two regions, the OECD (O) and the rest of the world (R). Suppose the marginal cost of controlling CO₂ emissions is $13 per ton. Let the marginal willingness to pay for pollution reduction be 14 - Q for region O and 8 - 2Q for region R, where Q is the amount of pollution reduction.

The United Nations is considering two proposed methods for controlling CO2 emissions, both involving polluters paying for the damage they cause:

Proposal A involves the polluters paying damages to each region for the pollution generated.

Proposal B involves the polluters in each region independently negotiating pollution reductions with the consumers of their respective region, assuming the other region is not undertaking pollution reduction.

What is the socially efficient level of emissions reduction Q*? A graph of the marginal abatement cost and the total marginal willingness-to-pay curves would be helpful. (Hint: CO2 emission reduction is a global public good)

How much total pollution reduction will occur under Proposal A and what will be the total compensation received by regions O and R? If those payments were instead placed in the general coffers of the UN, would the outcome be any different from an efficient point of view? Why or why not?

How much pollution would be generated under Proposal B? Explain any differences between this answer and the answer to parts (a) and (b).

pinkarmadillo937

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.

ECON-1006EL Study Guide - Final Guide: Marginal Utility, Marginal Cost, Allocative Efficiency

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