11_13_Final

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Topics Today (9/30/08) : 

Topics Today (9/30/08) Review of practice exam #1. General review and question session. Exam #1 is Thursday, October 2. Practice exam and review sheet are available on the website. Read [3.1] and [3.2] from your textbook for next class (10/7/08). McBurny students: send me an email asap. Go Red Sox! (and Brewers)

A Word About Exam Questions : 

A Word About Exam Questions Three kinds of “knowledge”: Descriptive Analytical Comprehensive Descriptive knowledge is just that: X is _______. Analytical knowledge is of the form: X is _______ for the following reasons. Comprehensive knowledge is of the form: X is _______ because of ________, and this means that we can expect the two (or more) things to demonstrate the following general (and related) characteristics.

A Word About Exam Questions : 

A Word About Exam Questions In evaluating an answer to an exam question: The comprehensive answer reveals a deeper grasp of the subject matter. A descriptive answer may be “right” in the descriptive sense, but undeveloped.

Aggregate MAC Curve : 

Aggregate MAC Curve MAC1 ? Pollution Reduction 22 10 11 MAC2 MACAggregate $ 4 5 7 9 16 MACAggregate is horizontal summation of firm-level MAC at each price. MACAggregate gives the MAC curve for the industry in aggregate.

Practice Exam #1 : 

Practice Exam #1 1. What do open access resources and public goods have in common? Explain how this common characteristic leads to the failure of markets for these goods (i.e., market failure).

Practice Exam #1 : 

Practice Exam #1 2. Last year the Rainforest Conservation Society (a Canadian environmental group) purchased the commercial hunting rights to an area of 7,700 square miles in British Columbia. The group’s plan is to ban hunting in this area. While this type of bargaining has been recognized for years as a potential solution to environmental issues, why has it not been implemented very often?

Practice Exam #1 : 

Practice Exam #1 The government of Busytown contracts with a private waste management firm to collect and dispose of household garbage. The landfill where Busytown’s garbage is dumped is located in Busytown (assume only Busytown garbage is dumped here). A recent scientific study revealed that pollution from the landfill has seeped into an aquifer that provides drinking water for all Busytown’s residents, and that the greatest threat is posed by hazardous materials found in products such as motor oil, batteries, and paint. The Busytown government is interested in adopting policies that will limit the disposal of these products. Currently all Busytown residents are charged $100 per year to have their garbage collected. Residents can dispose of at most two 50-gallon cans of garbage per week.

Practice Exam #1 : 

Practice Exam #1 3. Provide a general definition of a public bad. Are the damages caused by the disposal of hazardous materials a public bad? Why or why not? 4. Under the current waste management policy, are Busytown residents likely to limit the quantity of hazardous materials in their garbage? Why or why not?

Practice Exam #1 : 

Practice Exam #1 5. The following graph shows the marginal abatement costs for two pollution sources. The curves are labeled MAC-1 and MAC-2. On the graph, lowercase letters indicate quantities measured on the vertical or horizontal axis (e.g., b corresponds to a number of pollution units; a corresponds to some dollar value). Uppercase letters indicates quantities measured as areas (e.g., A is the area of the rectangle with height a and width b). Prior to being regulated, each source emitted P units of pollution, for a total of 2×P units. A government agency charged with regulating pollution decided that the total pollution from these sources should be reduced from 2×P units to P units. At first, the agency used a uniform command-and-control standard to regulate the sources. Later, the agency switched to using a green tax.

Practice Exam #1 : 

Practice Exam #1 The optimal green tax t*: Firm 2’s pollution level under CAC: Firm 2’s pollution level under the green tax: Firm 1’s pollution level under the green tax: The total cost of reducing pollution under the green tax: The cost savings to society achieved by using the tax instead of CAC:

Practice Exam #1 : 

Practice Exam #1 The optimal green tax t*: a Firm 2’s pollution level under CAC: c Firm 2’s pollution level under the green tax: b Firm 1’s pollution level under the green tax: d The total cost of reducing pollution under the green tax: (G+H)+(H+F+B) The cost savings to society achieved by using the tax instead of CAC: CAC cost=(G+H+D+E+F) + (H+F) Cost Savings = D+E+F-B

Practice Exam #1 : 

Practice Exam #1 The following information applies to question # 6. Consider two firms who initially release 5 units of pollution each, for a total of 10 units. The marginal costs for these firms to reduce their pollution are given below. For firm 1, for example, it costs $3 to eliminate the 5th unit of pollution it releases, it costs the firm $6 to eliminate the 4th unit of pollution it releases, and so on. Suppose that the government’s goal is to reduce the total amount of pollution from 10 units to 6 units. --------------- Firm 1 --------------------- ---------------- Firm 2 -------------------- Marginal Abatement Marginal Abatement Pollution unit Cost Pollution Unit Cost 5 $3 5 $1 4 $6 4 $3 3 $9 3 $5 2 $12 2 $7 1 $15 1 $9 6. Suppose the government initially uses a command-and-control (CAC) program where neither firm can exceed 3 units of pollution. How much would each firm be willing to pay the government to adopt a tradable pollution permit program (TPP) instead of CAC?

Practice Exam #1 : 

Practice Exam #1 7. In recent years the internet has been used by individuals to download music for free. However, the recording industry has begun suing people who download music for free, with the ultimate goal being to eliminate free downloads of music from the internet. As an economist, you’ve been asked to make an argument that the recording industry’s lawsuits are good for society. What is your argument?

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