Environmental Economics and Policy 1
Economics 3
Final Exam 2002.
Professor Peter Berck
Anna Gueorguieva, GSI
Answer all the questions. Total of 40 points
1. (2 points each) Define or explain and use diagrams as appropriate.
a. Coase theorem
b. Inferior good
c. Conservation Reserve
d. consumer surplus
2. (8 points) Using a diagram explain the output of a monopolist, the price the
monopolist charges, the monopolist’s profits, and the deadweight loss of monopoly.
Draw the picture for a monopolist who makes zero profits.
3. (8 points) Using a diagram, explain long run competitive equilibrium in an industry.
Be sure to indicate on your diagram the output of each firm, total output, and price. Now
consider the case where there is exactly one firm with lower costs and any number of
firms with higher costs (its U-shaped average cost curve lies below the other firms.)
Draw the market demand so that the long run equilibrium has many firms. What are the
profits of the firms in the long run. Relate this to the “grandfathering,” the practice of
allowing existing firms to pollute more than new firms.
4. (8 points total, 2 points each) The attached diagram has the isoquant relevant for this
problem. A regulator wishes to control the use of the input on the horizontal axis (input
1). The firm currently produces using technique (6,8). The regulator has determined that
the technique (3,16) will produce 50 units of output. Given these facts, (a) Given that
the price of input 2 is 1, what is the price of input 1? (b) how would the regulator set a
TBES? (c) how much is saved by the use of a TBES rather than a technology standard
requiring the technique of (3,15)? (d) what price for input 1 would lead to the same
choice of inputs as the TBES?
Show your work and hand in the attached diagram as part of your exam.
5. (8 points) Choose two environmental issues, such as the regulation of air pollution,
water pollution, forest practices, etc. Describe the need for regulation, and the regulatory
role of the Federal government and state government. Between 1 and 2 bluebook pages
will be sufficient for this answer.