Economics 3133 Midterm Information

Economics 2212 Final Exam Information

When and Where:Friday, December 7, 2012 (9:00am-12:00), Gym rows P, R, T

Format: Part 1: Define key concepts mentioned in the course. Some choice, be brief.

Parts 2-4:Longer answer questions: multipart questions. Each question will focus on a major topic area or model. Part 2 will deal with pre-midterm material. Parts 3-4 mainly with post-midterm material.

Coverage:Entire course but with more weight on post-midterm material (see format).

Examples of Longer Answer Questions (see also the midterm and the midterm information sheet):

1.(a) Say that marginal abatement costs for a polluter rise with the amount of abatement (SO2 emissions). Draw this.

(b) Say that if unregulated, a polluter will emit 1,000 tons of SO2 per year. Indicate this point in the diagram.

Illustrate the new outcome assuming that the polluter complies with the standard. In your diagram be sure to indicate the total amount now spent on abatement.

(d) Use your model (diagrams) to discuss the incentives this standard provides polluters to:

(i) decrease pollution below the level of the standard (500 tons); and

(ii) to invest in innovations that might decrease abatement costs.

(e) In (c) it was assumed that the polluter would comply with the standard. How high would the

penalty for over-pollution need to be to induce compliance? Explain.

2. (a) Use the optimal pollution model to indicate the efficient level of emissions. Explain why this level of emissions is efficient and show the gain to society of moving from the point of no abatement tothe efficient level of emissions.

(b) Say that the pollution in (a) comes from three different polluters and that these polluters have different marginal abatement cost curves.

(i) Draw this situation.

(ii) If you are to achieve the total reduction in emissions in (a) cost-effectively how would you

distributethe emission reduction among the three polluters. Illustrate and explain.

(iii) Use the model to comment on the efficiency of a uniform standard.

3. The cities of Bigtown and Smalltown differ in the marginal damages created by pollution (larger at each level of emissions in Bigtown) however the abatement cost curves are the same in the two cities.

(a) Provide a diagram indicating the efficient level of emissions for each of cities.

(b) (i) Say that the environment ministry sets a uniform standard for the two cities. Illustrate the efficiency loss associated with this policy.

(ii) Say that instead the environment ministry introduces a tax per unit of emissions and sets it to the same value for both regions. Will this achieve efficiency? Illustrate the likely outcome.

(iii) Suggest policies that would allow you to achieve an efficient outcome in this situation.

4. (a) What is a Pigovian tax? What is the logic behind it?

(b) Illustrate why, from a social efficiency point of view, too much paper is likely to be produced when the production of paper creates pollution (use the supply-demand model).

you need toset the Pigovian tax to achieve efficiency? Explain.

(d) Who gains and who loses from the policy? Use your diagram to illustrate the size of the

gains and losses.

5. The Federal government currently pays a rebate of $1000-$2000 on cars with fuel efficiency levels of less than 6.5 litres per 100km. Discuss the efficiency implications of this policy (provide a supply-demand diagram).

6. (a) What is a green good? Give examples.

(b) If a green good creates an external benefit what kind of policy response would you suggest?

Explain.

7. (a) Use the optimal pollution model to illustrate the following situations:

(i) damages from pollution of a particular type are so high that zero is the efficient level of

emissions;

(ii) the efficient level of emissions is greater than the actual level of emissions (i.e. the level polluters would emit without preventive policies);

(iii) a case with multiple polluters where at the efficient outcome one polluter does all of the

abatementand the other polluter does none.

(b) Explain how the efficient outcomes in (a) could be achieved using: (i) standards; (ii) taxes.

8. Say that two firms have the following marginal abatement costs:

Marginal Abatement Costs

Firm AFirm B

Emissions

1 9 20

2 9 16

3 7 12

4 5 10

5 4 8

6 2 6

7 2 4

8 1 2

9 - 1

10 - -

At maximum Firm A emits 8 units of emissions while Firm B emits 9 units for a total of 17 units.

(a) Say that marginal damages are constant at 6.5 per unit of emissions. What would the efficient level of emissions be? How much abatement must occur to achieve the efficient level of emissions and how much of the reduction will be made by each firm? Explain. How high are total abatement costs at the efficient outcome?

(b) (i) Say that the environment ministry gives both Firm A and Firm B permits allowing each of them to emit a total of four units. If these permits are tradeable, what will the likely outcome be? Explain.

(ii) What happens if the initial allocation gives Firm A permission to emit 6 units and Firm B permission to emit only 2 permits? Explain.

(c) If the environment ministry was to try and achieve the efficient outcome using a tax what would the value of the tax per unit of emissions have to be set at? (assume the tax is constant per unit of emissions). Explain.

(d) If the ministry were to try and achieve efficiency using a non-uniform standard what would the standard be for Firm A? What is it for Firm B?

(e) If you were Firm A which scheme would you prefer to face: the non-uniform standard, the tax or the tradeable emissions permit scheme? Explain.

9. (a) How could a tradeable emissions permit system be designed to deal with differences in marginal damages caused by different polluters?

(b) One question a tradeable emissions permit scheme must answer is how to make the initial allocation of permits. What are the main options? What are the implications of the system for distribution and the amount of trading likely to occur after allocation? Explain.

10. Say that a tradeable emissions scheme is in place. Assume that permits can currently be bought or sold at a price of “P”. Illustrate a case where given its marginal abatement cost curve and initial allocation of permits a polluter will want to sell permits and show the amount of permits it will want to sell.

11. Compare the tradeable emission permit system to the property rights solution to pollution problems.

12. (a) It can be argued that too few fuel-efficient cars will be bought and sold if decisions are left entirely to private buyers and seller. Use the supply-demand model to explain and illustrate why.

(b) Suggest policies that might move the market for fuel-efficient cars to efficiency. Illustrate the result and the likely efficiency gain.

13. Opponents of emissions taxes sometimes argue that polluters will simply pay the taxes and pass the cost on to consumers. As a result the tax will not reduce pollution and the distributional consequences will be undesirable. Is this correct? Explain.

14. There are also a number of useful questions at the end to the textbook chapters. See especially: Ch. 13, p. 225 (p.257 old edition) Discussion question 2

Ch. 11, p. 197 (p.224 old edition), Discussion question 4

Ch. 10, p. 179 (p.204, old edition) Analytical problem 4.

Ch. 9, p. 161 , (p. 184 old edition) Question 1.

15. (a) Thoroughly explain how the travel cost method and contingent valuation methods could be used to calculate the value of an unpolluted lake.

(b) (i) Outline the logic behind discounting. Why does Stern think you should not discount?

(ii) Are low discount rates good or bad for the environment? Justify your answer.

16. What does Coase’s theorem say? Explain why this idea could give the efficient level of pollution. What problems does this possible solution to pollution problems encounter in practice?

17. In the model of pollution abatement illustrate the efficient level of an emissions abatement subsidy. Compare the outcome to that of an efficient emissions tax.