ECON 311 Final Exam Spring 2005

Transcription

1 ECON 311: Economics of the Environment Name: Spring 2005 Bellas Final Exam You have three hours and twenty minutes to complete this exam. Answer all questions, explain your answers, label axes and curves on graphs and do your own work. Fifty points total, points per part indicated in parentheses. 1. We ll get this one out of the way first. Consider technological advances in abatement technology that lower the marginal abatement cost. Draw a diagram with abatement on the horizontal axis showing the cost savings to such an advance under each of the following policy types. A. A fixed abatement standard. (3) B. A fixed abatement subsidy. (3) Page 1 of 12

2 C. A flexible emission fee. (3) Page 2 of 12

3 2. One paper that was discussed briefly in class examined the effect that the Clean Air Act had on the heights of smokestacks at power plants in the U.S. A. Explain why, in the opinion of the authors, smokestacks on coal-fired boilers were taller when a plant was regulated by state pollution control authorities than when a plant was regulated by federal pollution control authorities. (3) States were exporting pollution to other states. B. What was different about the emissions from boilers fueled by natural gas? If you don t remember exactly, what do you think would be different about natural gas emissions and how state regulators deal with them? (3) Gas emissions are less damaging and states didn t make their stacks taller. Page 3 of 12

4 3. Consider a standard supply and demand diagram for some good such as sandwiches. A. Diagram a negative externality that results from the production of sandwiches showing the market quantity, the efficient or optimal quantity and the dead weight loss. (2) B. Diagram a positive externality that results from the consumption of sandwiches showing the market quantity, the efficient or optimal quantity and the dead weight loss. (2) Page 4 of 12

5 4. To address the problem of overcrowded classrooms in the evenings at Metropolitan State University, someone proposes building more classroom space and paying for the construction by imposing a surcharge (an extra fee) on tuition for classes that meet in the evening. Explain what is silly about this plan. (2) To quote one student s answer: By charging a higher fee for evening classes, more students may choose to take on-line courses or day courses to avoid paying the extra fees. This would leave less students in the evening classes and there would no longer be a need for the extra classroom space. Page 5 of 12

6 5. While it s difficult to deal with natural resource and pollution issues within a country, it s even more difficult to deal with them internationally. A. If most of the mercury that we are exposed to in the U.S. comes from power plants in Asia, what policy approach (of the pollution control policy regimes we have discussed: standards, fees and subsidies) would we most likely use to address the problem? (3) An abatement subsidy. We can t force them to obey a standard or pay an emission fee because we have no legal force there. B. Egypt is facing the breakdown of some long standing international agreements regarding use of water from the Nile River. In particular, Egypt is downstream from several other countries that would like to expand their use of Nile River water, leaving less for Egypt. Explain how, short of warfare, Egypt might resolve these issues with its upstream neighbors. (3) A subsidy to reduce or limit water use. Similar to the U.S. and Asia, Egypt really can t impose any restrictions on the other countries, it can only bribe them to use less. As several people pointed out, this would be somewhat like Coasian bargaining. Page 6 of 12

7 6. Nitrous oxides, or NO x, as they re lovingly referred to, are emissions from burning fossil fuels that contribute to smog formation. In cities, where smog is a problem, vehicles (cars, trucks, buses, etc.) are the major sources of NO x emissions. However, most of the effort to control NO x emissions has been directed at stationary sources such as power plants and other large facilities that burn a lot of fossil fuels. This may seem silly on the surface, but please explain why it might make sense. (3) Monitoring and enforcement costs are lower for stationary sources. Also, if you think that regulators care about net revenues from enforcement, you might point out that stationary sources are likely to have owners with deep pockets. Page 7 of 12

8 7. Regulations regarding water pollution might be created and enforced at the national level or at the state level. Please discuss the conditions under which it would be more efficient to regulate water pollution at the national level and when it would be more efficient to regulate water pollution at the state level. (3) Regulating at the state level can be more efficient if the water is contained within the state, as is the case with groundwater and some lakes. Regulating at the national level is more likely to be efficient when water crosses state boundaries as with rivers or some border lakes. Page 8 of 12

9 8. It s springtime here in Lake Wobegon, and that means that the snow is melting. Of course, when the snow melts and the rains come, the giant drifts of sparkling white road salt also get carried down the storm drains and eventually find their way into our neighboring bodies of water. Two of the economists in town, Dave and Al, were at the barbershop this week, talking about this very thing. Al was hoping that a good melt, accompanied by a warm shower would get rid of the salt quickly and clean the roads so that the old bicycle he likes to ride won t rust away any faster than necessary. Dave disagreed, being concerned that if all the salt entered the neighboring waters at one time, the shock would hurt the local walleye population and make the summer basically pointless. Al took the opposite view, claiming that it was just the total quantity of salt that mattered, not how quickly it entered the system, rather like ingesting saturated fat. Dave replied that how quickly it entered the system mattered very much, kind of like drinking bourbon or vodka. Who s right, Dave or Al? (Hint: The answer is, It depends, but what does it depend upon?) (2) Is the pollution issue chronic (resulting from long term exposure) or acute (resulting from short term high levels). If damage is done by chronic exposure to salt then Al is right. If damage is done by short term, acute exposure, then Dave is right. Alternatively, you could talk about salt being a cumulative pollutant (in which case Al is right) or a non-cumulative pollutant (in which case Dave is right). There may also be issues regarding the type of body of water. A river will be better able to disperse salt that enters slowly than it will be able to disperse a sudden heavy dose. A lake, on the other hand, that has a very slow flow of water through it may react similarly to the salt regardless of how quickly it enters because the salt won t really disperse in the lake. Page 9 of 12

10 9. The manufacture of one unit of a toxic substance costs $100. Proper disposal of a unit of this substance costs $150, but the substance may be disposed of improperly, but in a way that the disposer cannot be identified, at a cost of $20 per unit. What is the range of possible values for a subsidy for proper disposal that will encourage proper disposal without encouraging the production of the substance simply for collection of the disposal subsidy? Alternatively, if a subsidy that will achieve this is not possible, explain why not. (3) The subsidy must be less than the cost of production and proper disposal and greater than the difference between the costs of proper and improper disposal. $150 - $20 < subsidy < $100 + $150 $130 < subsidy < $250 Page 10 of 12

11 10. Imagine that pollution permits are going to used to control emissions from four companies whose marginal cost of abatement schedules are given below: Tons Firm A Firm B Firm C Firm D 1 $6 $1 $1 $2 2 $7 $3 $2 $4 3 $8 $5 $3 $6 4 $9 $7 $5 $8 5 $10 $9 $8 $10 6 $11 $11 $13 $12 7 $12 $13 $21 $14 8 $13 $15 $34 $16 9 $14 $17 $55 $18 10 $15 $19 $89 $20 Calculate the equilibrium distribution of permits under each of the following schemes. That is, for each plan described below, tell me how many permits will ultimately be held by each of the four firms. A. The pollution control authority sells permits at a price of $ (3) A: 2 B: 3 C: 4 D: 4 B. The pollution control authority will auction off 20 permits. (3) A: 5 B: 5 C: 5 D: 5 Page 11 of 12

12 C. Each firm will be given three permits and the firms will then be allowed to trade (buy and/or sell) permits. (3) A: 2 B: 3 C: 4 D: 3 D. Firm C will be given 11 permits and will be free to trade (sell) them. (3) A: 1 B: 3 C: 4 D: 3 Page 12 of 12