Download Final 2011 EEP1_v2

Final 2011: EEP1/ Econ 3
Berck, Chaidez, Majeed
Do All 6 Questions
1.
2.
3.
4.
5.
6.
(5--1 pt each) Explain whether each statement is true, false or uncertain.
a. Average cost is always above average fixed cost.
b. When price is above the minimum point of average cost a firm should always chose positive
production there will always be profits.
c. For the same non-market good, a valuation based on averting behavior will always give a higher
value than one based on stated preference.
d. Voluntary action always leads to a Pareto improvement.
e. Compensating and equivalent variation always give nearly identical results.
(8pts) The Clean Air Act and the Clean Water Act both seek to clean the environment. However, they have
slightly different roles for the states relative to the federal government. Give a brief account of how these
laws work. (Hint: think New Source Standards, TBES, State Implementation plan, Acid Rain, NPDES,
NAAQS, TDML). How are they fundamentally different?
(7 pts) Use a diagram with cost curves and a demand curve to show how the costs to the consumers are
affected in the short run and the long run by a tax on pollution. You may assume that the tax adds t $/unit
to the marginal cost of each firm. What does this do to average cost? Now assume that there are three
firms in the industry. Show how the short run supply curve changes. Now show how the long run supply
curve and the long run competitive equilibrium changes.
(8 pts) The demand for t-shirts is Q = 20 – P/2, where Q is the number of t-shirts and P is their price. The
private cost of producing t-shirts is C(Q) = 𝑄2 , with private marginal cost MCP = 2Q. Washing and dyeing
the t-shirts causes water pollution with total damages CE(Q) = 𝑄2 /2, marginal external costs of MCE = Q.
a. What is the private supply curve for t-shirts? Use that private supply curve plus the demand curve
to find the equilibrium price and quantity. Draw a diagram showing the private supply, demand,
and the equilibrium.
b. Next, add the marginal external costs to your diagram. Then calculate the full-cost supply curve
and add that to your diagram. Use the full-cost supply curve and the demand curve to find the
efficient price and quantity. Show these on your diagram.
c. Calculate net benefits for each of the efficient and market solutions.
d. Calculate marginal benefits of polluting = P (from the demand curve) – MCP. Add the external
costs of polluting to your diagram. What is the efficient quantity?
e. In this model, abatement is any reduction in production from the private-market equilibrium.
First, provide a formula for abatement based on that description. Now, substitute that formula into
the equations you have in (d) for the marginal benefit and marginal cost of polluting. Draw a
diagram showing he marginal costs and benefits of abatement.
(5 points)Think of a case where there are two industries, one of whose outputs cause pollution that harm the
other industry. Now consider a regulator who can only decide whether or not the pollution is illegal. When
transactions costs are low, will the regulators decision affect how much pollution there is? How money
changes hands? Explain.
(7pts) There are two beaches, not far from each other. One is polluted and one is not. Otherwise they are
identical.
a. How would you value the project of cleaning up the dirty beach, using a revealed preference
method? Carefully explain what you would observe and how you would use your observations.
b. How would you value it with a stated preference method? Again explain how you would do your
study.