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McMaster University

Economics

ECON 2J03

Rashid Khan

Winter

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Econ 2J03 Quiz #2 February14, 2014 Student’s Name:
Student’s #:
Problem Section: [25 marks]
Question #1: [8 marks] Each numerical answer is worth one mark
Consider Coase theorem with the following MAC and MDC functions.
The MAC function is:
MAC = 120 – 10E 12 = E + A
The MDC function is:
MDC = 2E
(a) Assume that the property right belongs to the victims. Find the following:
Optimal E =
Compensation rate for each unit of E to the victims = $
Total net gain of the victims = $
Total net gains to the polluters = $
(b) Assume that the property right belongs to the polluters. Find the following:
Optimal A =
Compensation rate per unit of A to the polluters = $
Total net gain of the polluters = $
Total net gain of the victims = $
Question #2: [7 marks] Each numerical answer is worth one mark
MAC of one source of pollution is given below.
MAC = 10 - E 1
Assume that there 10 identical pollution sources.
(a) (i) Write the aggregate mac function.
(ii) If total emissions were, aggregate total abatement costs will be = $
(c) Assume that MDC = 0.9E. Find the following:
(i) The optimal E =
(ii) The optimal A =
(iii) The total damage costs at the optimal E = $
(iv) The total abatement costs at the optimal A = $
(d) The net social cost at max E in comparison to optimal E = $ Question #3: [10 marks] Each numerical answer is worth 1.25 marks
The marginal abatement costs functions from two sources of pollutions are:
MAC = 10 – E 1
MAC = 10 – E
2 2
Total E = E1+ E 2
(a) Derive the aggregate marginal abatement cost function with E as an explanatory
variable.
(i) Derive the aggregate MAC function when E ranges from zero to 10.
MAC =
(ii) Derive aggregate MAC function when E ranges from 10 to 30.
MAC =
(b) Assume that MDC = 1.5E
Find the following:
TDC = $
TAC = $
(c) Assume that MDC = E
Find the following:
TDC = $
TAC = $
(d) Assume that MDC= 0.5E
Find the following:
TDC = $
TAC = $ 25 True-False Questions: [75 marks]
Circle True, if the statement is true and circle False, if the statement is false.
1. The four criteria of cost-benefit analysis are: efficiency, equity, flexibility
and enforceability.
2. The biases in the CVM are: strategic bias, information bias, starting point bias and
hypothetical bias. Information bias occurs when respondents provide biased
answers in order to influence a particular outcome.
Answer Question #3 on the basis of the following:
Consider the net present value of following projects:
Project 1: $64 million
Project 2: $70 million
Project 3: $60 million
3. The opportunity cost of project 1 is $70 million dollars.
The opportunity cost of project 3 is $70 million dollars.
4. Assume that the market supply curve is up-sloping. Environmental regulations on
private goods will lead to higher production costs; as a result, the supply will shift
upward to the left at given output. If the demand curve for private good is a
horizontal line (i.e. perfectly or infinitely elastic demand), then the incidence of
environmental regulations will be 100% on producers.
5. Consider a present value curve with present value (PV) in the vertical axis and
number of years in the horizontal axis.
If interest rate (i.e. discount rate) is zero, then the PV curve of one dollar will be a
horizontal line. If interest rate (i.e. discount rate) is positive, then the PV curve of
one dollar will be a down-sloping line.
6. The government-sanctioned emission standards for all vehicles in Canada
will achieve ambient standards in Canada.
7. Costs of public projects are progressively distributed, if relatively higher
proportions of costs are paid by relatively high-income people.
8. Liability laws on polluters can lead to socially efficient level of emissions,
because they provide an incentive for polluters to reduce emissions so as to
minimize total abatement costs plus compensation to pollution-victims.
9. Travel-cost methods are likely to over-estimate the value of wildlife corridors.
10. Horizontal equity implies equal treatment of people in similar economic
circumstances. Answer Question s #11 on the basis of the following table:
# of oil-spills Probability of oil-spills Damages
Zero

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