The Clean Air Act instituted trades between states for SO2 emissions

1. The Clean Air Act instituted trades
between states for SO2 emissions.
Several utility companies across geographic borders have engaged in such
trades in recent years. Consider a trade
between a utility in Wisconsin and the TVA in Tennessee. Assume that the trade reduces Wisconsin
electricity consumers’ bills by a total of $ 1 million, and lowers Tennessee
electricity consumers’ bills by $ 500,000.
Also assume that the trade improves local environmental quality in
Wisconsin by an amount that people value at $ 2 million. If the local environmental quality in
Tennessee declines as a result of this trade, then indicate a potential Coase
agreement that could avoid the environmental decline and would still make the
trade profitable to both parties ? Is such
a trade possible in this scenario ? (4
2. Chip and Dale run separate logging
companies in the same forest. Both pollute the river flowing through the forest
with debris from their work. In the table below, the first row shows the
current level of debris that makes its way into the river from their work. The
following rows show how much it would cost each logger to reduce its pollution
by additional increments of 10 pounds. You are the official from the EPA who is
responsible for the reduction of this pollution. Fully
describe the cost-effective mechanism that you will design to reduce the
current level of debris by half. (4 points)




Current debris
in pounds



Cost of
reducing debris by 10 pounds



Cost of
reducing debris by a second 10 pounds



Cost of
reducing debris by a third 10 pounds



Cost of
reducing debris by a fourth 10 pounds



Cost of
reducing debris by a fifth 10 pounds



3. Four
companies, Alpha, Beta, Gamma and Delta, are burning coal to produce
electricity. As a result, they also produce emissions. The first row of the
table below shows the total pounds of emissions currently produced by each
firm. The other rows of the table show the cost for each firm of reducing emissions
by the first 50 tons, the second 50 tons, and so on. You are an EPA official
and you want to design a cost-effective mechanism to reduce total emissions by
one third. What will be the new levels
of emissions of Alpha, Beta, Gamma and Delta under your mechanism ? (4 points)






production of emissions in tons





Cost of
reducing emissions by first 50 tons





Cost of
reducing emissions by second 50 tons





Cost of
reducing emissions by third 50 tons





Cost of
reducing emissions by fourth 50 tons

(no emissions




Cost of
reducing emissions by fifth 50 tons

(no emissions




4. Let qi
and qp represent the
total amounts of improper and proper disposal of soda cans. Thus if 25% of all waste is improperly
disposed off, then by default, 75% is disposed of appropriately and
safely. Let us say that total amount
disposed is 100 units, i.e

qi + qp
= 100

Assume that the total private and social benefits
equation for improper disposal (qi)
of soda cans is given by this equation:
The above equation is motivated by the
avoidance of time and resources to collect wastes, and to bring non-recyclables
to landfills and haul recyclables to a collection center. Because there are no external benefits, we
assume that the total social benefits equal private benefits from improper
disposal (3 points).

The marginal
private and the social costs of illegal dumping are:

MPCi = 4 qi + deposit
MSCi = 7 qi

a. Show that when there is no deposit (set
deposit = 0) private markets will dispose off a greater percentage of soda cans
improperly; more than the socially optimal level.
b. Calculate the amount of deposit that we
have to charge consumes at the front-end so as to achieve the socially optimal

5. The
total private benefits (TPB) and total private costs (TPC) of refined petroleum
are related to production levels (Q) as follows: (3 points)

TPB = 42 Q – 0.0625
TPC = 10 Q + 0.0375

We let total
private benefits (TPB) also equal total social benefits (TSB).
production involves externalities and the marginal external costs (MEC) are:

MEC = 0.05 Q

a. What is the level of production if the
market does not account for externalities ?
b. What
is the socially optimal level of production ?
c. Suppose the government imposes an excise
tax and achieves the socially optimal level of output. What is the dead-weight loss of this tax

6. The
World Resource Institute provides important information regarding global
environmental challenges. I reproduce 2
graphs from a recent study in their web-site (”> What can you infer from the two graphs ? Relate your inference to some of the
important concepts discussed this semester.
What can you say, based on your inference, about “free markets” ? So
what ? (3 points)

And another one:-

7. Consider
the following 2 statements: (2 points)

God said, Let us make man in our image, after our likeness: and let them have
dominion over the fish of the sea, and over the fowl of the air, and over the
cattle, and over all the earth, and over every creeping thing that creepeth
upon the earth (Genesis 1:26, King James Version).
God blessed them, and God said unto them, Be fruitful, and multiply, and
replenish the earth, and subdue it: and have dominion over the fish of the sea,
and over the fowl of the air, and over every living thing that moveth upon the
earth (Genesis 1:28, King James Version).

(a) and (b) tell us how to act with
respect to environmental and public goods.

Logically it
follows that we have to act in accordance to statements (a) and (b). Consequently, any act of environmental
protection and conservation policies is essentially doomed to failure, and
indeed, is a sacrilege..docx#_ftn1″ title=””>[1]

My question: Do you agree with statements (a) and (b)
and their implications ?

Now obviously a
simple, “Yes” or a “No” is not going to cut it.
You have to take a stance and argue supporting your position (logically,
scientifically and using economics).

Say there are
two camps: camp A that agrees with the statements and the implications, and
camp B which does not agree with the statement at all. You must take a position
with either camp, and argue as follows:

you are in camp A, then you have to identify the scientific and economic basis
for the claim, regardlessof the
economic-concerns raised in the class this semester.

you are in camp B, you have to scientifically and logically dismantle the
claims of camp A, based on the principles of economics picked up from this

8. Find ONE good example where markets have
actually solved the Tragedy of the
Commons Problem. (2 points)

.docx#_ftnref1″ title=””>[1]Hunting is an
admirable quality according to many other similar statements:
was a mighty hunter before the LORD; that is why it is said, “Like Nimrod,
a mighty hunter before the LORD (Genesis
then, get your weapons—your quiver and bow—and go out to the open country to
hunt some wild game for me (Genesis 27:3)

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