Final 2016: EEP1/ Econ 3Berck, Lu,Duquennois

Do All 6 Questions

  1. (5 pts) Briefly define
  1. demand curve

Quantity that will be CONSUMED as a function of price

  1. dead weight loss

The difference between the net benefits at the efficient outcome and the net benefits at the inefficient one (or Willingness –cost, or Surplus plus profits in efficient and inefficient)

  1. technology based effluent standard

An effluent standard that is set based on the effluent levels that could be obtained if a known less polluting technology were used.

  1. value of a statistical life

Willingness to pay to avoid a risk that would result in one more death in the population.

  1. consumer surplus

Total willingness to pay-(or are under demand)- less the amount paid.

  1. (6 pts) In this class we studied two major environmental laws: the Clean Air Act, and the Clean Water Act.
  2. What does each of these acts seek to do? Is the goal realistic?

The clean air act seeks to set ambient air quality standards for health (primarily) and environmental purposes.

The clean water act seeks to set water quality standards for health (primarily) and environmental purposes. IT seeks to eliminate all discharge to water, which is not realistic

  1. Explain two ways the Clean Air and two ways the Clean Water act protect air and water respectively (e.g.TBES).

Clean Air: TBES for mobile sources, acid rain trading, NESHAP, new source performance standards, state implementation plan’s and their TBES or trading plans.

set ambient standards states must meet

Sets standards for new stationary sources based on a technology based effluent standard

Sets vehicle emission standards

Uses cap-trade market to control acid rain pollutants

Clean Water: National pollutant discharge elimination system: requires every point source have a permit limiting its pollution using a TBES

Each state is required to have water standards for each body of water-if not met must develop plan to meet, incljuding total daily maximal loads and emissions standards to back them up

Used to include subsidies for sewage treatment

  1. How do these acts differ in the role that the Federal and State governments play?

Air standards are set by the EPA (Federal Government) (but California has its own more stringent regulations). States play a much more active role in establishing and implementing water standards. Thus if a state chooses not to, water standards are often not regulated.

  1. (8 pts) Two firms (firm P and firm D) emit GHG. Each firm initially emits 8 units of GHG. Their total abatement costs are given in the following table.

How much abate / 0 / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8
Total Abatement Cost ($) for firm P / 0 / 100 / 600 / 1200 / 1900 / 2700 / 3600 / 4600 / 5700
Total Abatement Cost ($) for firm D / 0 / 5 / 15 / 30 / 50 / 100 / 300 / 700 / 2000
  1. Define the marginal cost of abatement. Make a table showing the marginal cost of abatement for each firm.

Marginal Cost of Abatement: Marginal benefits lost from having to decrease pollution

Extra cost (in terms of lost benefit) of pollution reduction, given that q units of pollution have already been reduced.

0 / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8
MCAP / - / 100 / 500 / 600 / 700 / 800 / 900 / 1000 / 1100
MCAD / - / 5 / 10 / 15 / 20 / 50 / 200 / 400 / 1300
  1. The government sets a tax for pollution of $201 per unit emitted. How much does each firm emit? How much does each firmpay in tax? Explain how you came to your answer.

Firm P will pollute 7 units and pay $1407 in tax, Firm D will pollute 2 units and pay $402 in tax. They will stop abating if the marginal cost of abating becomes to be greater than the tax.

  1. Instead of a tax, the government give each firm permits to emit 4 units. It permits the firms to trade and trading is costless. How much does each firm emit now? Explain your answer.

Firm D will sell three permits to firm P. At this point firm D will be polluting 1 unit and Firm P will be pollution 7 units. For those three permits, the cost of abating the unit for firm D is lower than for firm P so it makes sense for them to trade.

  1. The firms are allowed to trade, as in c, however trading requires lawyers and the lawyers fee would be $500 for each firm. Once the fee is paid, the firm may trade any number of units. How much does each firm emit now? Explain.

The total reduction in cost from being able to trade the permits is $1150 (abatement savings of firm P-increased abatement costs for firm d= (700+600+500)-(50+200+400)=1150)

Since the total cost of lawyers will be $500x2=$1000 the two firms should still be able to find a payment for the permits that allows them to trade the permits as in part c. The gains from this trade for the firms will be lower though then in part c as the lawyers are capturing some of the gains.

(Turn this sheet over—more questions on the other side)

  1. (8pts) The cost curve for the city water supply is C(Q) = 16 + (1/4)Q2, where Q is the amount of watersupplied and C(Q) is the cost of providing Q acre-feet of water. Marginal cost is Q/2.
  2. (1pt) Providethe formulas for fixed cost, variable cost, average variable cost, and average cost.
  1. (2pts) Graph average variable cost and marginal cost. Does this firm have a shutdown point? Explain your answer.

Here the firm will “shut down”only if P=0 since for all positive prices, P>AVC.

  1. (2pts)How much will this firm produce when the price is 4? Explain.

The profit maximizing firm will produce where P=MC; P=Q/2. When P=4 this implies Q=8.

  1. (1pt) What will the firm’s profits be at a price of 4?

Profits=TR-TC=P.Q-(16 + (1/4)Q2)=32-16-16=0

  1. (2pts) What is the long run supply curve for an industry that is made up of firms with these costs? Why? (You may leave your answer as a radical)

In the long run all firms in the industry must break even which implies all firms will be in the situation above in the long run so the long run supply curve is a horizontal line at P=4.

  1. (5pts) Demand and EV
  2. (1pt)Draw a diagram with two budget constraints that differ only in the price of the good on the horizontal axis. Add two indifference curves, each one tangent to a budget constraint. Assume that the price of the good on the vertical axis is one.
  3. (1pt)Which bundle is chosen at the higher price? the lower price? Call the lower price the “original price” and the higher price the “new price.” Identify on your diagram the chosen bundles at each price.
  4. (3pts)Draw one more line on your diagram and use it to carefully explain what is the equivalent variation for the price change described above. (2 points)

Equivalent variation measures the amount of income I would need to take away from this person so that they are as bad off as experiencing the price increase. When price goes up, this person’s utility shifts from Uhigh to Ulow. If prices did not change but the person’s income was reduced their budget constraint would shift in, from BCoriginal to BCEV. With BCEv the person also has Ulow. So they are equivalently affected as with the price change. I can use the change in the intercept between BCoriginal to BCEV to calculate how much income was taken from them.

  1. (8pts) Two students share a bathroom and it is only as clean as they make it. Bathroom cleanliness is measured in total hours of cleaning per week (htotal), the total being taken over all the students. One student has p = 8 – htotal as his demand for cleanliness. The other has p = 9 -1.5 htotal as her demand for cleanliness. In both cases, p is not negative, that is, if enough work is done their valuation is zero. All students value their time at $5/hour. (All answers can be left as fractions)
  2. The students act independently of each other (they make no agreements.) How much work in total will be done to clean the bathroom? Explain. (2 pts)

No student will clean beyond the point where the value of their time exceeds the worth they get from additional cleaning. It is worth the student’s time to make sure the bathroom is cleaned up to that point. Since their time is worth $5, the first student will not clean beyond the bathroom having received 3 hours of cleaning and the other beyond 2.67 hrs which is lower. Thus we expect the bathroom would get cleaned for 3 hours.

  1. Graph the two demand curves and their vertical sum. What is the economic meaning of the vertical sum?

The vertical sum represents the willingness to pay for the public good of a clean bathroom.

  1. Suppose instead that the students sit down over a cup of tea and work out a Pareto optimal solution to their problem. How much work is done? Can you tell who does it? Explain. (3 pts)

From the vertical sum graph above we can see that optimally the students will clean for 4.8 hours (12/2.5) since that is when the sum of their willingness to pay=$5. There are many Pareto optimal allocations of the cleaning responsibilities so we cannot specifically tell who does the cleaning.

  1. Students are required to spend 4 hours each cleaning the bathroom. If they do not do their share, they are fined $6.00 per hour for each hour of undone work. How clean is it now? Who works and how much? (2 pts)

Since the fine is greater than the value of their time they will each spend the required 4 hours of cleaning. The Bathroom is now very clean with 8 hours being spent cleaning it. Since the students have the same cleaning cost, there are no opportunities to trade cleaning duties (assuming that is even permitted).