Acceptable logotypeECO 3620. Environmental Economics

Instructor: John Whitehead
e-mail: whiteheadjc@appstate.edu

Exam #2

The exam will consist of 6 open ended questions chosen randomly from the following 10 questions. You will be asked to answer 4 of the 6 questions.

1. Using a marginal abatement cost curve to represent the impact of water quality regulations on industry:

  1. Illustrate the total abatement costs of reducing water pollution to the level prescribed by the Clean Water Act.
  2. Is this abatement target likely to be efficient? Why or why not?
  3. Describe two methods to estimate these costs.
  4. Do these methods measure the full opportunity costs of pollution abatement? Why or why not?

2. Two well known economists, William Baumol and Alan Blinder, have stated that, in the long run, "nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environmental improvement and the arts" than the rate of growth of productivity.

  1. Define productivity.
  2. See if you can verify Baumol and Blinder's very strong claim ("nothing contributes more...") through the following exercise. Assume GDP in the U.S. is $10 trillion, and that the labor force remains constant in size and fully employed. Estimate the value in GDP in one years' time if productivity growth is 3%. What if it were only 2%? How much will GDP fall in two years time if productivity growth remains at 2% rather than 3%? In three years?
  3. Using your answer to (a) why might environmental regulation reduce productivity growth? Why might it increase productivity growth? Which effect do you think is more likely to be bigger?

3. In 1992, the U.S. was the odd-country out at the Rio Earth Summit. President Bush chose not to sign an otherwise universally-approved treaty on biodiversity, and his administration successfully weakened an agreement designed to curb carbon-dioxide emissions thought likely to cause global warming. In both cases the President maintained he was, in the Wall Street Journal's paraphrase, "protecting American jobs from environmental extremists." Since then the jobs versus environment rhetoric has escalated, with several industry-sponsored studies forecasting job losses in the millions if the United States were to achieve the greenhouse gas reduction targets specified in the Kyoto global warming treaty.

  1. Based on the information presented in the textbook, would signing the environmental treaties originally under consideration be likely to generate an economy-wide, net decrease in the number of U.S. jobs?
  2. Illustrate your answer with a production possibilities diagram with dirty output on the vertical axis and clean output on the horizontal.
  3. Explain your answers to a) and b) in a few sentences and with empirical evidence from the Bureau of Labor Statistics.
4. Consider a product market that generates negative externalities and a labor market subject to a tax on wages.
  1. Illustrate graphically and describe two ways that pollution taxes could improve efficiency (i.e., the double dividend hypothesis).
  2. What are the effects of your answer to (a) on the equilibrium price and quantity in the product market.
  3. Suppose your answer to (b) leads to inflation. Illustrate graphically the effects of your answer to (b) on the labor market outcome. Comment on the double dividend hypothesis under these circumstances.
  4. Has environmental regulation in the U.S. caused inflation? Base your answer on the empirical evidence from the Bureau of Labor Statistics and Table 9.1 in your textbook.
5. Suppose that an environmental regulation that costs $400,000 today (one-time) would save $1 million worth of health costs 20 years from now.
  1. Calculate the net benefits and benefit-cost ratio at discount rates of 0%, 2%, 7% and 10%.
  2. Which discount rate would industry argue for? Which discount rate would environmental groups argue for?
  3. Which discount rate can be best justified by the long-term rate of government borrowing? Explain.

6. Consider Table 10.4 in your textbook.

  1. What are the net benefits of options A, B and C?
  2. Which is the best policy based on net benefits? Which is the best policy based on the benefit cost ratio?
  3. Why do your answers to (b) and (c) differ?
  4. Which is the best policy? Explain, using the marginal benefit cost ratio.

7. Consider the graphical two-polluter model. Firm 1 is an old, dirty firm and Firm 2 is a new, clean firm. The efficient abatement level is the width of the horizontal axis.

  1. Given a uniform emissions standard illustrate the total abatement costs for Firm 1 and Firm 2.
  2. Given an efficient emissions tax, how does the allocation of pollution abatement change? Define the total abatement costs for Firm 1 and Firm 2 with the tax.
  3. Which policy is more efficient, the uniform standard or the tax? Why? Define the differences in total abatement costs for Firm 1 and Firm 2 under the two policies.
Alternative #7 for the math geeks: Two firms can control emissions at the following marginal costs: MC1 = 200P1, MC2 = 100P2. Assume that with no regulation at all each firm would be emitting 20 units of emissions or a total of 40 units for both firms.
  1. Given a uniform abatement standard define the total abatement costs for Firm 1 and Firm 2.
  2. Compute the cost effective allocation of pollution abatement responsibility if a total reduction of 20 units of emissions is necessary.
  3. What is the amount of the emissions tax that would lead to your answer in (b).
8. Consider the graphical two-polluter model. Firm 1 is an old, dirty firm and Firm 2 is a new, clean firm. The efficient abatement level is the width of the horizontal axis.
  1. Suppose permits are handed out uniformly and no trades take place. Illustrate the total abatement costs for Firm 1 and Firm 2.
  2. If the permits are tradeable how does the allocation of pollution abatement change after trading? Define the total abatement costs for Firm 1 and Firm 2 with the allocation of permits after trading takes place.
  3. Which policy is more efficient, non-tradeable permits (a) or tradeable permits (b)? Why? Define the differences in total abatement costs for Firm 1 and Firm 2 under the two policies.

9. Suppose that the government decides to issue tradable permits for a certain form of pollution.

  1. Does it matter for economic efficiency whether the government distributes or auctions the permits? Explain.
  2. If the government chooses to distribute the permits, does the allocation of permits among firms matter for efficiency? Explain.

10. Draw a MAC curve for a single representative firm in a polluting industry and assume the efficient pollution level is 50% of total pollution.

  1. Illustrate where an emissions tax should be set to obtain the efficient emissions level.
  2. Illustrate the total abatement costs of the tax.
  3. Under this tax in the long run, will business firms provide more, less or the same emissions as your answer to #1?
  4. On the same diagram illustrate where an emissions subsidy should be set to obtain the efficient emissions level.
  5. Under this subsidy in the long run, will business firms provide more, less or the same emissions as your answer to #1?