Economics, the Environment, and Sustainability

Please provide short, succinct answers. You should be able to answer the question in the space provided. Think before you write. Quantity is not a substitute for quality. Good luck.

1. Define scarcity, and briefly explain the relationship between scarcity, choice, and opportunity cost. [10 pts]

Scarcity: More of a resource is wanted than is available at a zero price. In other words, any unit of a resource is scarce if there is a valuable alternative use. Because there is a valuable alternative use, an allocation choice must be made. When a unit of a resource is allocated to one use, the highest valued alternative use is the opportunity cost of that allocation.

2. In a society with diverse values, can tyranny of the majority occur under social policies based on (i) deontological and (ii) teleological ethics? Briefly explain for each case, and demonstrate that you know the key features of each ethical system. [10 points]

Under deontological ethics an action is deemed ethical based on the intrinsic rightness of the action relative to other possible actions, and not on a judgment of the relative merits of the anticipated consequences of the action. Under teleological ethics an action is deemed ethical based on a judgment of the merits of the anticipated consequences of the action relative to other possible actions. In a diverse society it is possible for a majority holding one set of values to tyrannize a minority holding different values. This can occur either because of differences in intrinsic values assigned to a given action, or because of different values assigned to anticipated consequences of an action.

3. Describe the key steps involved in selecting the utilitarian-ethical social policy from among a set of policy alternatives, in the manner envisioned by Bentham. [10 points]

One would first identify a set of policy alternatives.
Next one would determine the likely consequences of each policy alternative [consequentialism].
Next, for each policy alternative, one would measure the level of utility (+) or disutility (-) to each member of society affected by the policy alternatives [welfarism].
Next one would sum the individual utilities and disutilities to arrive at a measure of net social utility [sum ranking].
The utilitarian-ethical social policy would then be the one that yields the largest net social utility.

4. List and briefly describe the necessary conditions for the existence of a well-functioning competitive market. Your answer should not contain the words efficient or equilibrium. [10 points]

Buyers and sellers fully informed of prices, qualities, location, and alternatives
The presence of many buyers and sellers, each of whom is small in size relative to the overall market (thus no individual can manipulate market price)
No large and substantial positive or negative externalities
The absence of collusion among buyers or sellers
Well-defined and established property rights
Low transaction costs
The existence of a functional market institution
Low-cost entry by potential market participants

5. Environmental regulation arose in part to protect unowned resources from harm. U.S. law provides remedies for harms by others to resources owned by individuals, various government entities, or by a community. What rights, when bundled together, imply "ownership?" [15 points]

Access: The right held by authorized entrants, such as those who pay admission fees at National Parks.
Withdrawal: The right held by authorized users to withdraw resource units, such as those who buy fishing, hunting, mushroom-gathering, or firewood-cutting permits.
Management: The right held by claimants to manage resources, such as might exist for farmers on government irrigation projects.
Exclusion: The right held by proprietors to determine who can access, withdraw, and manage a resource, such as those citizens who jointly set policy for a locally self-governed common-pool resource.
Alienation: The right of an owner to sell or otherwise transfer a resource to a new owner.

6. Carefully draw a large and fully labeled and annotated supply/demand diagram that describe how the market failure (in an otherwise well-functioning competitive market) resulting from a positive externality differs from that of a negative externality. Your diagram should clearly distinguish how the presence of each type of externality affects supply/demand and equilibrium price and quantity, and your annotation should briefly explain why. Finally, your diagram should show the market inefficiency that results from each type of externality; this inefficiency forms the neoclassical economic argument for possible efficiency-enhancing environmental regulation. [25 points]

When Positive Externalities occur as a byproduct of a market transaction, market demand is understated, and too little of a good or service is produced and consumed, and at too low a price. A deadweight loss occurs because if the external value created by exchange were to be internalized into the market (e.g., by way of a voluntary contribution), then there would be an increase in mutually satisfactory transactions between buyers and sellers.

When Negative Externalities occur as a byproduct of a market transaction, market supply is overstated, and too much of a good or service is produced and consumed, and at too low a price. A deadweight loss occurs because if the external cost created by exchange were to be internalized into the market (e.g., by way of a Pigouvian tax), then there would be a decrease in mutually satisfactory transactions between buyers and sellers.

7. Suppose that competitive market supply is given by the expression P = 20 + 0.2Q, while market demand is given by the expression P = 220 - 0.8Q, where P is price and Q is the quantity of the good or service produced and exchanged in the market (both prices are in dollars). In addition, suppose that marginal external cost is $10.00 per unit produced. [20 points]

a. Compute the competitive market equilibrium P and Q in the absence of Pigouvian taxes or other pollution-control regulation of this market. Show your work.

b. Compute the competitive market equilibrium P and Q when a Pigouvian tax is imposed on producers. Show your work.

c. Describe precisely how the competitive market equilibrium P and Q you described in 7.a. above is inefficient. Your answer should include a computation of the amount of implicit price subsidy. Show your work.

Too much is produced (10 units too much) at too low a price ($8 implicit price subsidy). As shown in the diagram in question 6, when there are negative externalities there is a deadweight loss, and so total surplus is less than would occur if a corrective Pigouvian tax were imposed (assuming the Pigouvian tax could be imposed costlessly).

EXTRA CREDIT -- worth 5 extra credit points: Compute the amount of deadweight loss in problem 7 above. Show your work.

Deadweight Loss = ½*[(Excess Q)*(Marginal External Cost)] = ½*[10*$10] = $50