Economics
423 Two-Thirds Term Examination, Fall 2001, Professor Steven Hackett
Your
name (2 points): Answer Key
Please
provide the very best answer to each of the questions below.
Part
I: Matching
(4 points each). Please connect the description on the right side of the table
below with the best-matching word or phrase on the left side of the table.
There is only one match for each phrase, and there are extra words or phrases.
|
Word
or Phrase |
Match |
Description |
|
A. Rule of capture
externality |
A |
1.
This cost is imposed on other fishers when one fisher lands a large haul of
fish from a common-pool resource. |
|
B. Marginal Hotelling rents
= 0 |
L |
2.
A Pigouvian tax will cause this to occur in a market where firms pollute. |
|
C. Marginal benefit =
marginal cost |
N |
3.
The core concept that underlies teleological systems of ethics such as
utilitarianism. |
|
D. Categorical imperative |
C |
4.
Occurs at the level of pollution control where total net benefits are
maximized. |
|
E. Indirect costs of
regulation |
F |
5.
This occurs when subsidies are used to purchase conservation easements that
limit development on farmland providing open space and habitat benefits to
society. |
|
F. Positive externalities
are internalized |
J |
6.
This occurs when price is above the equilibrium price in a competitive
market. |
|
G. Total benefit = total
cost |
M |
7.
This efficiency criterion is met for participants in a well-functioning
competitive market in equilibrium, but is nearly impossible to satisfy in
public policy actions. |
|
H. Kaldor-Hicks efficient |
P |
8.
This is reduced or eliminated when fishers are given individual transferable
quota shares of total allowable catch. |
|
I. Marginal Hotelling rents
are large |
Q |
9.
The contingent valuation method can measure these values, but the travel cost
method cannot. |
|
J. Surplus (excess supply) |
B |
10.
This relationship between price and marginal cost is dynamically efficient
when resource stocks are abundant, and current consumption does not limit
future consumption. |
|
K. Direct compliance costs |
I |
11.
This relationship between price and marginal cost is dynamically efficient
when resource stocks are quite scarce, and current consumption limits future
consumption. |
|
L. Negative externalities
are internalized |
E |
12.
These costs associated with environmental protection, restoration, or
conservation come about when pollution-control investment reduces competition
or slows the rate of economic growth. |
|
M. Pareto efficient |
|
|
|
N. Consequentialism |
|
|
|
O. Shortage (excess demand) |
|
|
|
P. Derby effects |
|
|
|
Q. Non-use (existence)
values |
|
|
|
R. Use values |
|
|
Part
II: Analysis
(5 points each)
Use
the following information for the next five questions. Suppose that in a
well-functioning competitive market, demand is given by the equation P = 1050 -
0.5Q, private-cost supply is given by the equation P = 50 + 1.5Q, marginal
external cost is $200, and social-cost supply is given by the equation P = 250
+ 1.5Q.
1.
Solve for the equilibrium price and quantity if firms are allowed to freely
pollute. Show your work.
1050 - 0.5Q = 50 + 1.5Q ==> Q = 500; P = 1050 - 0.5*500 =
$800
2.
Calculate the true net gains from trade from question 1 above (consumer and
producer surplus that market participants receive minus total external
cost). Show your work.
[$(1050-50)*500]/2 - $200*500 = $150,000
3.
Solve for the equilibrium price and quantity if a Pigouvian tax is imposed.
Show your work.
1050 - 0.5Q = 250 + 1.5Q ==> Q = 400; P = 1050 - 0.5*400 =
$850
4.
Calculate the true net gains from trade with a Pigouvian tax (assume that the
tax revenues are used to compensate those harmed by pollution, or to clean up).
Show your work.
[$(1050-250)*400]/2 = $160,000
5.
By how much is efficiency enhanced by the use of a Pigouvian tax (subtract the
correct answer to question 2 above from the correct answer to question 4.
above). Show your work.
$160,000 - $150,000 = $10,000
Use
the following information for the next two questions. Suppose that there are
100 units of a nonrenewable natural resource available over two periods (0 and
1). Demand in each period is given by the equation P = 100 - 0.5Q. Marginal
cost is a constant $20 in both periods. The discount rate is 50 percent.
6.
Which of the following is the dynamically efficient allocation of this
resource? Clearly circle one answer:
7.
Prove your answer to question 5 above is correct by showing below that
Hotelling's rule is satisfied:
Year 0: P = 100 - 0.5*72 = $64; PDV (P-MC) = $(64-20)/(1.5)0
= $44
Year 1: P = 100 - 0.5*28 = $86; PDV (P-MC) = $(86-20)/(1.5)1
= $44
Part
III: Short answer (5 points each)
1.
Briefly describe (a) the types of values that can be measured with the
contingent valuation method (CVM) that cannot be measured with other non-market
valuation techniques, and (b) the key shortcomings of the CVM.
(a) Various non-use values, including existence, option, and
bequest.
(b) One shortcoming is that the CVM is involves hypothetical
rather than actual expenditures. Another is that some CVM studies have featured
embedding bias, in which respondents indicate a value for an overall feature
(ex, protecting 100,000 acres of habitat) equal to the value of a smaller
subset of the feature (ex, protecting 10,000 acres of habitat).
2.
Briefly provide examples of (a) types of pollution abatement and control costs
(or direct compliance costs), and (b) types of indirect costs of environmental
protection, restoration, and conservation.
(a) Money spent on pollution-control devises. Money spent on
workers responsible for monitoring and maintaining those devises. Government
expenditures on monitoring and enforcement of environmental standards.
(b) The fixed cost of pollution abatement and control
expenditures can result in increased industry concentration (more sales by a
smaller number of firms). Fewer firms can in turn lead to collusion and higher
prices. The higher prices are an indirect cost of regulation. Another indirect
cost of regulation would be that money spent on pollution abatement equipment
and labor could have been spent on productivity-enhancing investment. Thus
pollution expenditures can lead to slower productivity growth rates and in turn
slower rates of economic growth and material standards of living. Thus the
slower pace of economic growth and material standard of living is an indirect
cost of regulation.
3.
Carefully draw a fully-labeled diagram that clearly shows a demand curve, a
private-cost supply curve, a social-cost supply curve, consumer and producer
surplus, and total external cost in an equilibrium in which firms can freely
pollute.
Please see figure 4.4 on page 67 of your textbook. Using that
diagram, you are asked to identify area abc and area bcde.