1. When emissions are measured on the horizontal axis, the marginal cost of abating emissions is

Transcription

1 Eco 333 Name Test 2 29 July 2011 Please write your answers in ink. You may use pencil to draw graphs. Part I: each question is worth 2.5 points. Part II: each question is worth 25 points, so allocate your time efficiently. Part I 1. When emissions are measured on the horizontal axis, the marginal cost of abating emissions is a. downward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. b. downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. c. upward-sloping because emissions become more and more easy to eliminate once the firm makes the initial commitment to do so. d. upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain. 2. Which of the following is a disadvantage of the command-and-control approach to the problem of pollution? a. It creates licenses to pollute. b. It is undemocratic. c. It only works in societies where everyone (or almost everyone) has a high degree of environmental consciousness. d. It usually overlooks less costly ways to achieve given goals. 3. The optimum level of emissions a. is zero. b. occurs where no damage to the environment is being done. c. occurs where the marginal external benefit equals the marginal damage cost. d. occurs where the marginal damage cost equals the marginal cost of abatement. 4. Direct controls imposing identical emission limits on all polluters are a. efficient if emissions can be accurately monitored, which is seldom possible. b. equitable because under this system all polluters bear equal costs. c. likely to require a great deal of high-cost pollution reduction. d. more efficient and equitable than a system of fines because fines matter less to large than to small polluters.

2 5. Protecting air quality by establishing identical low limits on noxious discharges for all firms is a questionable policy because a. a little pollution from many sources adds up to excessive pollution. b. by allowing firms to pollute at all it sacrifices the community's interest to private profit. c. it does not allow firms that can only prevent air pollution at a high cost to exceed the limits. d. it tolerates air pollution that could have been prevented. 6. In equilibrium, the price of a transferable emissions permit a. is constrained to the amount the government first charged for it. b. equals the marginal cost of abatement for all firms. c. equals the marginal cost of abatement for the firm with the highest cost, and exceeds the marginal cost of abatement of other firms. d. equals the marginal cost of abatement for the firm with the lowest cost, and is less than the marginal cost of abatement of other firms. 7. When new technologies make cleaner production possible, a. emissions fees rise. c. the price of transferable permits rises. b. emissions fees fall. d. the price of transferable permits falls. 8. Suppose Factory A emits 15,000 units of "Yuck" monthly, Factory B emits 30,000 units, and Factory C emits 45,000 units. Also suppose A's cost of reducing the emission is $1 per unit, B's cost is $2 per unit, and C's cost is $3 per unit. If the EPA required each factory to pay a $2.01 tax for each unit of yuck it emits monthly, what would be the new level of total monthly emissions, and what would be the total cost of cleanup? a. 45,000 units; $75,000 c. 45,000 units; $90,000 b. 45,000 units; $105,000 d. 45,000 units; $120, An economist claims that there are substitutes for clean air. This really means a. clean air is free air. b. there are costs to cleaning the air. c. nobody is truly harmed by unclean, polluted air. d. dirty air is better than clean air. 10. Suppose Factory A emits 15,000 units of "Yuck" monthly, Factory B emits 30,000 units, and Factory C emits 45,000 units. Also suppose A's cost of reducing the emission is $1 per unit, B's cost is $2 per unit, and C's cost is $3 per unit. If the EPA wishes to reduce total emissions down to 45,000 units per month, which of the following is the lowest-cost method? a. Leave Factory C alone, and force both A and B to each reduce their emissions to zero units per month. b. Leave Factory A and B alone, and force C to reduce emissions to zero units per month. c. Leave Factory A alone, and force both B and C to each reduce their emissions to 15,000 units per month. d. All of the above would be accomplished at the same cost.

3 Part II 1. Able Company and Baker Company each emit 10 tons of waste into the atmosphere per year, for a total of 20 tons. The regional air quality control (AQC) board wishes to halve the emissions and is debating whether to require the two companies to cut their emissions to five tons a day each (command and control) or to tax the emissions. Because they manufacture different products, with different technologies, Able and Baker estimate the costs of reducing their emissions quite differently: Emissions Reduced (tons/year) Total Abatement Costs Source A Source B a. If the board decides to issue a regulation requiring each company to cut its emissions to five tons, what is the total clean-up (abatement) cost? b. Suppose the AQC board decides to tax emissions. What tax rate per ton of emissions emitted will cut emissions to a total of ten (10) tons? By how much will each firm cut its emissions? What is the total social cost of the pollution abatement? What will the emission tax policy cost each firm? Explain whether the emission tax could be designed so that both Able and Baker would prefer the tax to command and control regulation. c. Suppose the community prints ten (10) transferable discharge permits (TDPs), each of which entitles the holder to emit one ton of emissions. If the permits are distributed equally, what will the final emissions be for each source? Assume that permits are traded in a competitive market. What is the price of a TDP? d. What is the total social cost of the pollution abatement? What is the net cost (the cost of abatement plus, or minus, the cost of permits) to each firm?

4 2. Railway engines create sparks, which sometimes set fire to crops planted near the tracks. A large number of farmers are affected, and transactions costs prevent the farmers and the railroad from negotiating bribes or side payments. The price of railway service is $300 per train, and each train causes $60 of crop damage. The accompanying diagram shows the relevant market for railway service. a. Suppose a Pigovian tax of $60 per train is imposed on the railroad and given to farmers. By how much will social gain increase? Damage Suffered by Farmers With No Tax With Pigou Tax b. Suppose that the farmers can move their crops away from the tracks at a cost of $3000 per month. If the goal is to achieve economic efficiency, which party should be made liable for the crop damage? What will be the resulting social gain? Cost to Farmers Railroad Liable Farmers Liable

5 c. Suppose that farmers still have the option of moving their crops as described in part b. Also suppose that the railroad can install safety equipment that will prevent the engine sparks at a cost of $30 per train. If the goal is to achieve economic efficiency, which party should be made liable for the crop damage? What will be the resulting social gain? Cost to Farmers Railroad Liable Farmers Liable 3. The following table shows the effects that varying numbers of flights will have on the net revenues of airlines using an airport and on the value of real estate in the neighborhood of the airport. Flights Airlines' Net Revenue Rental Value of Real Estate a. How many flights will be scheduled each week if the airlines do not take into account the effects of their actions on the value of the surrounding real estate? b. What are the marginal potential gains from trade (or marginal cost of the externality) at the solution point in part (a)? c. What is the number of flights that maximizes society s welfare, and what are the total potential net benefits from reducing the number of flights to this number? d. If airlines are not liable for damage, but owners of rental property incur no costs in contracting with airlines, how much would the owners of rental property be willing to pay to airlines to reduce the number of flights per week to the number you found in part (c)? How low must transactions costs be for this negotiated settlement to occur? Explain.