KEY -- Economics 423 -- Environmental and Natural Resources Economics

Mid-Term Examination 1, Fall 2006, Professor Steven Hackett

 

Part I: Each question in Part I is worth 3 points

 

Price ($)

Quantity Supplied

Quantity Demanded

10

300

1500

20

400

1400

30

500

1300

40

600

1200

50

700

1100

60

800

1000

70

900

900

80

1000

800

90

1100

700

100

1200

600

 

1. What is the equilibrium price ____70____ and quantity ___900___ in the table above?

 

2. At what price in the table above is there an excess supply of 600? ____100___

 

3. Which of the following, if any, would cause equilibrium quantity to decrease? (circle any/all correct answers)

 

Outward shift in demand                                    Internalizing a positive externality

 

Internalizing a negative externality               Inward shift in supply

 

 

4. Which of the following, if any, would cause equilibrium quantity to increase? (circle any/all correct answers)

 

Outward shift in demand                                Internalizing a positive externality

 

Internalizing a negative externality                      Inward shift in supply

 

 

5. True/False (circle one): Tyranny of the majority can happen when a diverse society sets social policy under deontological system of ethics, or when society sets social policy under a utilitarian system of ethics.

 

6. True /False (circle one): Under deontological ethics, one has a categorical imperative or duty to act in a certain way.

 

7. True/ False (circle one): If it costs a firm more to clean up its pollution emissions than to pay a Pigouvian tax, then a profit-maximizing firm will generally choose to clean up its emissions rather than pay the Pigouvian tax.

 

8. True/ False (circle one): The California energy crisis occurred because Enron had a complete monopoly on all energy supplies in California, and was able to set a monopoly price, even when energy demand was low.

 

9. True /False (circle one): Scarcity is experienced by both humans and animals as a natural part of life on earth. It can also be created or enhanced through advertising by business enterprises.

 

10. True /False (circle one): As the term is used in this class, economic rationality does not necessarily require that people conform to the preferences and materialistic tendencies of the dominant consumer culture.

 

11. True/ False (circle one): A market failure occurs when special interest groups cause regulations to be ineffective or to benefit the business enterprises being regulated. An example of government failure would be when there a market is dominated by one or two large firms.

 

Part II. Matching: There is one unique word or phrase match on the left for each of the 10 statements on the right. Please fill in the letter for the correct match (3 points each):

 

Word or Phrase

Statement

A. Polluting firms in an industry, and the consumers of the good they produce.

__L__1. This happens in the market when a negative externality is fully internalized.

B. Pastureland in the Swiss alps that is held in common by residents of an adjacent village.

__I__2. If you have this you have access rights, but not withdrawal rights.

C. Equilibrium price rises, quantity rises, and deadweight loss is eliminated.

__C__3. This happens in the market when a positive externality is fully internalized.

D. Deontological ethics and duty theory

__A_4. These groups may politically oppose internalizing negative externalities.

E. Kaldor-Hicks efficiency

__B__5. An example of common property.

F. Pareto efficiency

__J__6. This restricts the ability of the US government to take private property rights without compensation.

G. Deadweight loss

__M_7. Distance to market and transport costs can undermine the economic viability of this activity.

H. A valid California fishing license

__O__8. This is a government intervention in a market that fully internalizes negative externalities.

I. A visitor pass to California State Parks

__K__9. Under traditional common law, if someone harms you or your property, then you have this, a legal recognition of your right to sue for damages.

J. The takings clause of the 5th Amendment to the US Constitution

__E__10. This standard states that a social policy is efficient when net social benefits are maximized relative to all other options, even if some people are made worse off.

K. Legal standing

 

L. Equilibrium price rises, quantity falls, and deadweight loss is eliminated.

 

M. Rural recycling

 

N. A per-unit subsidy to producers equal to marginal external cost.

 

O. A per-unit Pigouvian tax equal to marginal external cost

 

 

 

 

 

 

Part III. Students do either III.A. OR III.B., not both.

 

III.A. FOR STUDENTS ATTENDING 4th UNIT LAB SESSION ONLY  

 

Suppose that demand is given by the equation P = 10,000 - Q

Private-cost supply is given by the equation P = 1000 + 0.5Q

Social-cost supply is given by the equation P = 3000 + 0.5Q

Marginal external cost is $2000

 

1. (6 pts): Derive the numerical value for equilibrium price and quantity assuming that firms can freely pollute without regulation or reputational consequences. Please show your work.

 

P = $_4000___             Q = __6000__

 

10,000 – Q = 1000 + 0.5Q è Q = 6000; P = 10,000 – 6000 = 1000 + 0.5*6000 = 4000

 

2. (5 pts): Derive the numerical value for the gross gains from trade to buyers and sellers (ignoring negative externalities) associated with the correct answer to question 1 above. Please show your work.

 

Gross gains from trade = $_27,000,000__

 

(10,000 – 1,000)*6000/2

 

3. (5 pts): Derive the numerical value for total external cost associated with the correct answer to question 1 above. Please show your work.

 

Total external cost = $_12,000,000__

 

6000*$2000

 

4. (6 pts): Derive the numerical value for the true net gains from trade to market participants and society associated with the correct answer to questions 1-3 above. Please show your work.

 

True net gains from trade = $_15,000,000__

 

$27,000,000 - $12,000,000

 

5. (5 pts): Derive the numerical value for equilibrium price and quantity assuming that a Pigouvian tax has fully internalized negative externalities. Please show your work.

 

P = $_5,333.33__          Q = _4,666.67__

 

10,000 – Q = 3000 + 0.5Q è Q = 4,666.67; P = 10,000 – 4,666.67 = 3000 + 0.5*4,666.67 = 5,333.33

 

6. (5 pts): Derive the numerical value for the true net gains from trade associated with the correct answer to question 5 above (assume that the proceeds of the Pigouvian tax goes to cleaning up the pollution or compensating those harmed by pollution). Please show your work.

 

True net gains from trade = $_$16,333.334___

(10,000-3000)*4,666.67/2

 

 

7. (5 pts): By how much, in dollar terms, does the Pigouvian tax above enhance market efficiency (as measured by increased gains from trade) relative to the unregulated case? HINT: This is the area of deadweight loss. Please show your work.

 

Increased gains from trade due to Pigouvian tax = $1,333.333.33

 

DWL = (Qpvt – Qsoc)*M.E.C./2 = (6000-4,666.67)*$2000/2

 

III.B. FOR STUDENTS WHO ONLY ATTEND THE 3-UNIT LECTURE 

 

1. (4 points) (a) In the space below, carefully draw a fully labeled supply and demand diagram, and carefully indicate equilibrium price and quantity, as well as consumer and producer surplus.

 

 

See figure 3.4 and accompanying narrative in 3rd edition of textbook

 

 

2. (9 points) (a) In the space below, carefully draw a fully labeled supply and demand diagram for a positive externality. (b) Clearly show how positive externalities result in an inefficient equilibrium quantity traded in the market. (c) Briefly, in words, describe an example of a positive externality, and a government policy that could internalize this positive externality and induce the efficient equilibrium quantity.

 

 

See figure 4.1 and accompanying narrative in 3rd edition of textbook

 

 

3. (12 points) (a) In the space below, carefully draw a fully labeled supply and demand diagram for a negative externality. (b) Clearly show how negative externalities result in an inefficient equilibrium quantity traded in the market. (c) Show deadweight loss when there is no regulation. (d) Briefly, in words, describe an example of a negative externality, and a government policy that could internalize this negative externality and induce the efficient equilibrium quantity.

 

See figure 4.4 and accompanying narrative in 3rd edition of textbook

 

 

 

4. (12 points) (a) In the space below, draw a fully labeled supply and demand diagram for a commodity that has (i) a relatively cheap virgin-sourced supply, and (ii) a relatively expensive recycling-sourced supply. (b) Clearly show the overall market supply curve for this commodity. (c) Show the equilibrium quantity of recycling-sourced supply for some intermediate level of market demand. (d) In words, describe a public policy that could cause the equilibrium quantity of recycling-sourced supply to be larger, and the equilibrium quantity of virgin-sourced supply to be smaller, in this market.

 

See figure 5.5 and accompanying narrative in 3rd edition of textbook