Economics 423 -- Environmental and Natural Resources Economics (Spr. ’07)

Exam 1, Professor Steven Hackett

 

Name (1 point): Answer Key   Each of the 33 questions below is worth 3 points.

 

Part 1: Only for those taking the course for 3 units and NOT participating in the 4th unit lab

 

Price ($)

Quantity Supplied

Quantity Demanded

5

500

1,500

10

600

1,400

15

700

1,300

20

800

1,200

25

900

1,100

30

1,000

1,000

35

1,100

900

40

1,200

800

45

1,300

700

50

1,400

600

 

1. What is the equilibrium price $__30__ and quantity __1000___ in the table above?

 

2. At what price in the table above is there an excess supply of 600? $__45___

 

3. Suppose that the market in the table above has a $20 marginal external cost for each unit of output produced. In the absence of any regulation, total external cost in the “free market” equilibrium will be:

$__20,000__       = $20 x 1000 units produced from question 1 above.

 

4. Suppose that a Pigouvian tax of $20 per unit of output produced is used to fully internalize the negative externality in the market in the table above. This causes an inward shift in supply. Now sellers will require an additional $20 added to price in the table above. Quantity supplied equals 0 for all prices below $25. Thus in the revised supply schedule quantity supplied equals 500 when price equals $25, 600 when price equals $30, 700 when price equals $35, and so forth. The relationship between price and quantity demanded, however, has not changed.  First revise the supply schedule in the table above, then determine the new:

 

Equilibrium price $__40__ and quantity ___800___ from the revised table above.

 

 

5. Which of the following, if any, would usually 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

 

 

 

Part 2: Only for students participating in the 4th unit lab

 

Suppose that demand is given by the equation P = 1000 - Q

Private-cost supply is given by the equation P = 100 + Q

Social-cost supply is given by the equation P = 300 + Q

Marginal external cost is $200

 

1. 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 = $_550__                 Q = __450__

 

 

 

2. 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 = $__202,500__

 

 

 

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

 

Total external cost = $__90,000___

 

 

 

4. 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 = $__112,500__

 

 

 

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

 

P = $__650__   Q = __350___

 

 

 

 

Part 3: All students

 

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

 

Outward shift in demand                                Internalizing a positive externality

 

Internalizing a negative externality               Inward shift in supply

 

 

7. True/False (circle one): In general, an increase in overall demand for recycled materials will raise the equilibrium price of recycled materials and thereby make it possible to supply a larger quantity of recycled materials from rural areas with higher transportation costs.

 

8. True /False (circle one): In general, subsidies can offset some of the higher collection/sorting/shipping costs associated with rural recycling, which in turn will increase the quantity of recycled commodities these centers can supply at a given commodity market price.

 

9. True/ False (circle one): PG&E strongly opposed the deregulation of California’s electricity system in the mid-1990’s due to concerns that wholesale electricity prices would rise above fixed retail prices charged to residential consumers.

 

10. True / False (circle one): The ability of Enron and other energy traders to “game” the California energy markets under deregulation was due in part to an over-reliance on day-ahead spot markets and inadequate reserve power supplies, so that individual trades that held back supplies could trigger power emergencies.

 

11. True/ False (circle one): Deregulation in California eliminated spot markets and required that all power plants had to be owned by PG&E and other utilities. The 2000-2001 California energy crisis occurred because the recession caused electricity demand to shrink, driving wholesale electricity prices below the cost of generation.

 

12. True/ False (circle one): In well-functioning competitive markets for storable non-renewable resources, if sellers anticipate future prices will decline, sellers will reduce current sales quantities and increase future sales quantities. This will bring current and future prices into balance.

 

13. True /False (circle one): In well-functioning competitive markets for non-renewable resources with steady-state demand and constant marginal extraction costs, prices over time will rise roughly in proportion to the discount rate or interest rate.

 

14. True /False (circle one): If there are three policy options for managing a parcel of National Park land, then the opportunity cost of the preferred option is the value of the next best alternative that must be given up if the preferred option is selected.

 

15. True /False (circle one): Scarcity, and thus economics, has been a part of all human societies over time, and is not simply an artificial construct created by capitalist enterprises.

 

16. True/ False (circle one): A public policy that is Kaldor-Hicks efficient implies that while some people are better off, and perhaps some are unaffected, nobody is made worse off by the policy.

 

17. True /False (circle one): Internalizing negative externalities may not immediately eliminate pollution generated by the market, but it generally results in fewer emissions, and will help “level the playing field” and improve the market viability of costly, less-polluting alternatives over time.

 

18. True /False (circle one): When positive externalities are internalized in a well-functioning, competitive market, price reflects the social benefits of the good being bought and sold, and not just the private benefits.

 

 

Part 4: All students. Clearly write the letter for the word or phrase (on the left) beside the description (on the right) that matches it. Each word or phrase has at most one uniquely correct match.

Word or Phrase

Description

A. Recyclable natural resources

19. _I_ When a choice is made in the context of scarcity, this is the value of the best option that had to be given up.

B. State (government) property

20. _P_ The concept underlying teleological ethics.

C. Usufructuary rights

21. _A_ These often have secondary markets where previously used resource competes with "virgin" resource sold in primary markets.

D. Kaldor-Hicks efficient

22. _D_ This efficiency criterion is satisfied when a policy option generates the largest possible net social benefits. 

E. Tragedy of the commons

23. _R_ The gap between price and marginal cost that occurs in competitive commodity markets due to resource scarcity.

F. Positive externality

24. _N_ Occurs when price is above equilibrium in a well-functioning competitive market.

G. Buy too much

25. _F_ An external benefit generated from production and exchange and enjoyed without payment by members of society.

H. Pigouvian tax

26. _S_ These will cause current nonrenewable resource prices to be relatively low, but future prices to be relatively high.

I. Opportunity cost

27. _G_ Consumers do this in markets suffering from unresolved negative externalities because price reflects marginal private cost rather than marginal social cost.

J. Pareto efficient

28. _H_ Name of a policy intervention that internalizes negative externalities.

K. Common property

29. _K_ The property rights regime in which the rights of access, withdrawal, management, and exclusion are held in common by a group of proprietors.

L. Appropriation externality

30. _B_ The property rights regime that describes the ownership of Patrick’s Point State Park.

M. Open access

31. _C_ Certain use and withdrawal rights to property that is owned by others. 

N. Excess supply

32. _O_ Measure of market inefficiency that represents lost (or negative) gains from trade.

O. Deadweight (social) loss

33. _E_ Occurs in a common-pool resource under open access conditions (or other failed property rights systems) due to self-interested appropriators.

P. Consequentialism

 

Q. Categorical imperative

 

R. Marginal profit

 

S. High discount rates