Final Exam: Env. Econ 1.
Answer all six questions.
1. (7 points) While a effluent standard and an effluent tax can induce a firm to have the same level of effluent per unit output, the tax and standard will lead to different amounts of the final product being purchased and therefore lead to different amounts of pollution. Using appropriate diagrams (it takes two diagrams) show that this statement is true. Carefully label the diagrams and explain what you have done.
2. (7 points) A target price-deficiency payment program has very little deadweight loss if the supply curve is very inelastic. Draw and carefully label a picture to illustrate this case. Identify the target price, the price consumers pay, the government outlay for the program, and the deadweight loss.
3. (7 points) Assume that there are two goods whose prices are P
= 3, P
= 2. Income is 12. Draw a diagram with this budget constraint and indifference curves to show a consumer who would choose the bundle x
= 2 and x
= 3. Explain why this consumer would make this choice of bundle. What would the consumer’s choice be if all prices and income were doubled? Now suppose income increased to 18 and prices are back to P
= 3 and P
= 2. Draw the budget constraint and an indifference curve showing the new chosen bundle. Make your drawing in such a way that x
is an inferior good.
4. (7 points) Define marginal revenue. Demonstrate that a necessary condition for a monopolist to maximize profits is marginal revenue equals marginal cost. Now draw a case where it is better for the monopolist to make nothing than to operate where MR = MC.
5. (5 points) Give a brief description of the role of the United States and of the States in preserving or enhancing environmental quality. It will be enough to briefly describe three policies or laws, so long as both the US and the States have a role.
6. (7 points) Draw and carefully label a diagram and use it to explain why an emissions target can be met at the lowest possible cost no matter how rights to pollute are distributed between two agents in a cap and trade system. Now suppose that transaction costs are very high. In your diagram which agent should own the rights to pollute (at least according to Coase). Make an argument as to why this method for allocating pollution rights might not be socially desirable.