Transcript Class 2 - University of Essex

Class 2
Environmental Economics
Exercise 1
The market for paper in a particular region has the supply and demand curves:
QD = 160,000 - 2,000P
QS = 2,000P - 40,000
where Q is measured in hundred-pound lots, and P is price per hundred-pound
lot. There is currently no attempt to regulate the dumping of effluent into
streams and rivers by the paper mills. As a result, dumping is widespread. The
marginal external cost associated with the paper production is given by the
expression:
MEC = 0.0002Q.
a.
Calculate the competitive price and output, assuming that no attempt is
made to monitor or regulate the dumping of effluent.
b.
Determine the socially optimal levels for price and output. If your
answers in (a) and (b) are different, explain the source of the difference.
c.
Sketch a diagram showing the costs or benefits to society of allowing
the market to operate in an unregulated fashion.
Exercise 2
The marginal social costs and abatement costs of a certain type
of air pollution for a factory are given as:
MSC = -1121 + 22.5Q
MCA = 879 - 17.5Q,
where Q = units of pollution per day, and MSC and MCA are
measured in dollars. The factory is located in a small town that is
currently setting community standards. You have been hired to
perform the analysis requested below.
a.
If the community wishes to set a pollution standard for
the factory, what daily level of pollution should be allowed?
b.
As an alternative, some members of the town council
favor an emissions tax for the factory. If a tax is implemented, at
what level should the tax be set?
Exercise 3
The most popular state park in the Craggy Mountains recently reached the point
where a common property resources problem arose — too many people hunted
for wild boar each season. The boar population became over hunted and was in
peril of extinction. An economist at the local university studied the problem for
the park management and estimated the following cost and revenue relationships:
Demand: P = 10 - 0.008Q
Marginal social cost: MSC = 1.00 + 0.0067Q
Marginal private cost: MPC = 1.00 + 0.0010Q.
The variable Q represents the number of boars killed each season and price P is
in hundreds ($).
a.
Determine the equilibrium number of boars killed per season, when
there is unlimited access to the park.
b.
Determine the per boar fee that must be charged to reduce the harvest
to the efficient level.
c.
Determine the social cost of unlimited hunting of the boar.
Exercise 4
Ms. Moneynickel has a monopoly in oil refinement in the local
market.
The demand for Ms. Moneynickel's oil is: P = 65 - q.
The relevant marginal revenue function is: MR(q) = 65 - 2q.
Ms. Moneynickel's marginal cost function is: MC(q) = 8.
In the refinement of oil, Ms. Moneynickel emits pollution that has
the marginal external cost function: MEC(q) = 2.
a) What level of output will Ms. Moneynickel select to maximize
profits?
b) What is the marginal social cost of Ms. Moneynickel's profit
maximizing output?
c) What do consumers pay for Ms. Moneynickel's refined oil? Is
this level of output efficient? Should more or less oil be
refined to reach the optimum output level?
d) Should the local government charge Ms. Moneynickel a pollution
fee for each unit of oil she refines?
£
Remember???
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SMC
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Figure 4.15
Yt
The polluting monopolist
PMC
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b
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c
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MRY
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Exercise 5
Buchanan Industries receives profits from polluting according to the formula
Profits = p = 10Q  Q2, where Q = pollution emitted (in tons), and profits are
measured in dollars.
Marginal benefits (MB) of polluting, derived from this function, are
MB = 10  2Q.
The damages associated with pollution from this facility are estimated as Damages
= D = Q2 + 2Q, where damages are measured in dollars.
The marginal damages (costs) associated with that function are
MD = 2Q + 2.
a) Draw a graph with the marginal benefits and marginal damage curves. Be sure
to label the axes.
b) If Buchanan Industries could ignore the damages it caused, how much Q
would it produce? How much profit would it earn at this level of production?
How much would total damages be? What would be the net benefits, the
difference between profits and damages?
c) What is the efficient Q for this industry? How much profit would Buchanan
Industries earn at this level of production? How much would total damages
be? What would be the net benefits, the difference between profits and
damages?
Exercise 5
d) Deadweight loss is the difference between the net benefits with
the efficient level of pollution and net benefits with another
level of pollution. What is the deadweight loss associated with
Buchanan Industries ignoring damages that its production
causes? Show the deadweight loss on your diagram. If
Buchanan Industries would not on its own produce at the
efficient Q, is it acting contrary to its own best interests by
producing at the level in (c)?
e) Those who live near Buchanan Industries propose that
Buchanan Industries produce no more than Q = 1. What is the
deadweight loss associated with this level of production? If Q
= 1 is an inefficient level of production, are those who live near
the factory acting contrary to their own best interests by
pushing for Q = 1?
Exercise 5
f) Who benefits from reducing Q from the initial level in (a) to the
efficient level in (b)? Who bears the costs? Is this change Pareto
improving?