Economics 155/Earth Systems 112 Spring Final Exam

Transcription

1 Economics 55/Earth Systems Spring Final Exam Instructions Do not open this exam before it is time to begin. If you are a graduating, write Grad on your first bluebook so we can get your grades submitted. The exam has 3 parts. Be sure to answer each part in separate bluebooks and to hand in your blue books separately. This is a closed-book, closed-note exam, so please store all electronic devices, textbooks, papers, etc by the time the exam starts. You will have a total of 80 minutes to complete this exam. The exam is worth a total of 80 points, so you should allocate your time accordingly. Point values are indicated for each question. Points will be allocated roughly equally among question parts. Pace yourself carefully, and provide clear, concise answers lengthy explanations are not necessary! In depicting areas on graphs, be sure that the grader can determine your intent. Letter or shade areas as necessary. Ambiguity may lead to lost points. At least one member of the Econ 55 staff will be available outside the auditorium at all times. We cannot answer questions, but please notify us if you feel you ve found a mistake in the exam or if you observe a classmate engaging in behavior contrary to the Honor Code. We have tried to make the questions as clear as possible, but if you feel that additional assumptions are required in order to answer a question, state what assumptions you are using (but please don t ask us what assumptions to use). Good luck! Page of 6

2 . (0 points) a. What is the rebound effect associated with a fuel efficiency standard for automobiles? b. The diagram below indicates the marginal costs of damage from pollution, MC D, the expected marginal costs of abatement, MC A, and two other possible marginal costs of abatement: MC A and MC A. i) what letter indicates the deadweight loss of a tax set under the assumption of MC A when marginal costs of abatement are lower than expected ii) what letter indicates the deadweight loss of a quota set under the assumption of MC A when marginal costs of abatement are higher than expected Page of 6

3 . (35 points) Some taxing questions. Answer the following with one or two brief sentences or a simple diagram when required a) Consider the market for a product that is used by consumers. Assume that the production of the product is perfectly competitive, the industry supply curve is flat, and that production is associated with negative environmental externalities. Using a clear graph depicting this situation, answer the questions below: i) indicate Q M, the quantity of product produced by a market without regulation, and Q*, the optimal quantity ii) indicate ΔCS, the change in consumer surplus associated with moving from the unregulated quantity to the optimal quantity iii) indicate ΔPS, the change in producer surplus for firms if the optimal quantity is brought about by a quota system where firms receive permits for free b) Recycling the revenue created by an environmental tax or auctioned permits and using the revenue to cut distortionary taxes reduces the gross costs (i.e. not including environmental benefits) of an environmental policy. Use a diagram of a labor market with either a pre-existing payroll or income tax (your choice) to show the gain in welfare due to recycling revenue relative to not recycling. Be sure to label your axes. c) Suppose that the nature of pollution damage was such that the marginal external costs (the externalities) were due to the costs that society faced from cleaning up pollution damage. Use separate graphs to show that, if marginal external costs are rising, i) the optimal tax will lead to tax revenue being more than enough to clean up the damage. ii) a tax based on exactly raising the revenue required to clean up damage will be lower than optimal. d) Consider two firms that create a uniformly mixing pollutant (so no hot spots ). Use a diagram of the two firms abatement costs to show how a tax on pollution brings about a costeffective solution. What additional information would you need to know in order to determine if this tax was at the most efficient level? 3. (0 points) a) Define weak and strong sustainability. For each of these definitions, indicate the role (if any) of shadow prices in measuring whether sustainability is achieved. b) Does weak sustainability imply that natural capital is inessential? You may find a graph helpful but not essential in illustrating your answer c) How does the insecurity of property rights affect the prospects for sustainable development? Page 3 of 6

4 Part II. Separate bluebook 4. (4 points) Consider the Manne-Richels two-period model of optimal abatement under uncertainty, where marginal abatement costs in the present (period ) and future (period ) are given by MC = γ a MC = γ a where γ, γ > 0 Let p be represent the probability of a bad scenario, where society must perform cumulative abatement of in order to avert catastrophe. a) Solve for the level of first-period abatement that minimizes expected costs of abatement. b) According to your answer in a), does it make sense to undertake some abatement in period, no matter how small the size of p (so long as p is not zero)? Show why diagrammatically and offer intuition for your result in terms of the expected payoff from a small amount of firstperiod abatement. c) If abating now (i.e. a ) decreases γ (i.e. there is learning-by-doing /endogenous technological change), how does this change your results in (b)? Provide the intuition d) Fixed setup costs is an assumption that can change the conclusions from the model. Provide an expression for an equation that you could use to determine the fixed costs (F) that would make first-period abatement no longer worthwhile. Don t try to solve for F; just give the first equation that you d write down in the process of solving for F. 5. (0 points) The diagram below indicates the demand for water by a given agricultural district and a municipal (urban) district. The prices p a and p m are the prices currently charged by a given district to users within the district. Unit costs of transporting water between the districts are equal to the distance u in the diagram. Page 4 of 6

5 a) Copy the diagram into your bluebook and show how society could reallocate water between the two districts to increase societal net benefits. u, the per-unit transportation cost of water (assume it is constant) QT, the quantity of water traded (be sure that it is consistent between the two markets) GU, the gross increase in benefits to the urban/municipal district LW, the gross loss in benefits to the agricultural district NG, the net gain to society b) Suppose that more water in the urban district would lead to less pollution in local urban waterways. Would this increase or decrease the net benefits to society of the trade, and why? Show the change in net benefits on your diagram. c) How would you know whether the total amount of water used by the urban and agricultural districts was the efficient quantity? What institutional features of water markets make it unlikely for the quantity to be efficient? 6. (6 points) The diagram below indicates the marginal benefits and marginal damages for the US and EU due to greenhouse gas emissions (e). The marginal benefits of a region s emissions to itself are indicated by the downward sloping lines. The marginal damages of a region s emissions to itself are indicated by MD Home ; the total marginal damages of a region s emissions (marginal damages to itself and the other region) are indicated by MD Total. a) Use the letters in the diagram to indicate i) the emissions that the US would choose unilaterally ii) the net benefits that the US would gain under the emissions in i), relative to no abatement iii) the benefits to the EU of US s emissions reductions in i) iv) the net benefits to the US of the US and the EU emitting at the co-operative level, relative to the unilateral level b) Redraw the diagram above (including the letters) to depict a situation where the US would have to pay a side-payment to the EU in order to obtain the co-operative solution. What letters indicate the minimum that the EU would accept to decrease their emissions from the unilateral level to the co-operative level? Page 5 of 6

6 Part III (Separate Bluebook) 7. (35 points) Consider a given marine fishery in long-run equilibrium. Assume that this fishery is not large enough to affect the price of fish (for the given species involved) on the world market. Assume also that each additional unit of effort can be supplied at the same cost. a) On a diagram with effort (E) on the horizontal axis and sustainable total revenue (TR) on the vertical axis, depict the relationship between TR and E and explain why it takes the shape it does. b) Add a curve depicting total cost of effort (TC) and use it to indicate the level of effort, Ec, that will result if there is open-access to this fishery (you can assume that this effort does not put the fishery at risk for extinction). What profit will fishers in this industry earn? c) Indicate the efficiency-maximizing level of effort, E* and the rents that are generated by this effort. Explain the incentives for individual fishers that causes Ec to be different than E*. You can use either a graph relating marginal revenue (MR) and marginal cost (MC) or briefly provide the intuition in words. d) In words, briefly, why would monopolizing this fishery lead to the efficient level of harvest? e) Reuse your graph from (a) or redraw it to show how a regulator could bring about E* by decreasing the productivity of fishing effort. Provide an example of a policy that would do this. Why, even though E* is being achieved, is this outcome not really efficient? f) Suppose that regulators aimed to maximize the sustainable yield. Why might regulators choose this outcome over the efficient one? How could a regulator achieve this level of effort i) via an individual quota system? ii) via a tax on effort? 8. (0 points) One of the options for California to meet its goals for greenhouse gas emissions reduction is through offsets: letting firms that are required to reduce greenhouse emissions earn credit for funding projects elsewhere that reduce emissions below what they would have been otherwise. a) why is there a baseline problem associated with offsets? b) assuming that out-of-state projects are equally legitimate, why would allowing California companies to purchase credits from out-of-state offset projects likely be more cost-effective than restricting credits to in-state offset projects? c) why might the American Lung Association of California advocate for allowing only in-state offset projects? d) Considering the issues above, and others, how does allowing out-of-state offset projects affect the political feasibility of California policies to reduce greenhouse emissions? Page 6 of 6