Download EE Exam 1_Winter 2014

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Environmental Economics
Exam 1
NAME:_______
You have 1 hours and 55 minutes to respond to the following. Please use the space provided for your responses.
There is additional space on the back page.
1. The market for gadgets is reflected by the demand and supply relationships below.
Demand: P = 1200 – 3Qd
Supply: P = 200 + Qs
Suppose gadget consumption provides additional benefits to the community and that these external benefits amount
to $100 per gadget.
a. Solve for the market equilibrium price and quantity. Show this in a clearly labeled diagram. Calculate consumer
and producer surplus at the market equilibrium. (6 points)
b. Solve for the socially optimal price and quantity of gadgets and show this in your graph. If the external benefits
are ignored, how much deadweight loss exists at the market outcome? Show your work for partial credit. (6 points)
2. Explain the four broad categories of problems that can prevent free markets from allocating resources efficiently.
Use examples of each from our readings, articles, movies or homework assignments. (12 points)
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3. The Florida economy can use economic resources to produce combinations of sugar cane and wilderness areas.
a. Use a clearly labeled production possibility frontier to show this tradeoff. (5 points)
b. Using a clearly labeled indifference curve in the graph above, show how the Florida economy might find the
allocatively efficient quantity of sugar and wilderness. Identify the efficient point with as “E”. Identify a point “F”
that is feasible in production but would not be allocatively efficient. (4 points)
c. Why is point E preferred to point F? Use marginal analysis to complete your explanation. (6 points)
4. Two lumberjacks are arguing about how many Douglas fir trees should be harvested from a forest in Oregon.
One says that “in order to maximize the net economic benefit from the trees we need to determine the quantity that
maximizes the difference between the total benefit and total cost of the harvest”. The second lumberjack says, “I
completely disagree. We need to find the quantity of trees where the marginal benefit of the next tree we harvest is
exactly equal to the marginal cost of harvesting the tree.” Who is right? Use a graph(s) to make your argument. (12
points)
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5. According to the Save Our Seas Foundation:
“Overfishing occurs when fish and other marine species are caught faster than they can reproduce. It is the
result of growing demand for seafood around the world, combined with poor management of fisheries and the
development of new, more effective fishing techniques. If left unchecked, it will destroy the marine ecosystem
and jeopardise the food security of more than a billion people for whom fish are a primary source of protein.”
Some free-market advocates argue that overfishing of some species should be corrected by market forces. After all,
if a species is fished to extinction, profits will permanently fall to zero. Use your economics knowledge to explain to
them why ocean species tend to be overfished and why the overfishing is entirely predictable, especially in a
competitive marketplace. (12 point)
6. Explain the reasons why GDP is not a good measure of social welfare. (12 points)
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7. The college is considering an investment of $120,000 today in new air-conditioning units. These are supposed to
reduce electricity expenses by $40,000 for each of the next 3 years. If the prevailing interest rate is 1%, is the
investment dynamically efficient? Show your work. (10 points)
8. The city of Hanover is considering how many times the streets should be cleaned each month. Suppose there are
only three residents, sisters Kim, Kourtney and Khloe. The table below shows each individual’s marginal benefit of
different amounts of street cleanings. Each street cleaning would cost the city and additional $9.
Quantity of street cleanings
per month
0
1
2
3
4
5
6
Kim’s individual
MB
Kourtney’s individual
MB
Khloe’s individual
MB
$10
8
6
4
2
0
$9
8
7
6
5
4
$5
4.50
4
3.50
3
2.50
a. If each sister had to pay for street cleaning on her own, how many street cleanings would each sister be willing to
pay for and how many would the city provide? (3 points)
b. What is the optimal number of street cleanings in Hanover? Explain how you came to this outcome. (6 points)
c. If payment is done on a voluntary basis, will Hanover be able to collect enough cash from the sisters to pay for
the optimal number of street cleanings? Explain why or why not. (6 points)
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