Final Exam EEP 1 / Econ 3
Professor Peter Berck
Fall 2009
Luosha Du and Koichiro Ito, GSR
Answer all 6 Questions. Clearly mark 2 blue books as Blue Book A and Blue Book B and answer Q1, Q2 & Q3 in
Blue Book A and Q4, Q5 &Q6 in Blue Book B. Don’t forget to write your name on all blue books and on the
diagram! Good Luck!
1.
2.
3.
4.
5.
6.
(5 pts) Define or explain in a few sentences
a. Deficiency Payment program
b. Elasticity of demand
c. Indifference curve
d. Public good
e. Equivalent Variation
(8 pts.) Consider a farm regulated with an effluent standard for leachate. The attached figure shows an
isoquant and two isopleths (equal pollution curves). Show your work on the attached figure as well as
writing an explanation in your blue book.
a. Label the curves on the diagram and explain why a tangency between a price line and an isoquant
is important.
b. What are the prices on the price line that makes the unregulated input bundle the cost minimizing
bundle? Assume the price of water is one. (You may leave your answer as a fraction and/or
round off numbers to the nearest 10. Note that the diagram does not go all the way down to zero!)
c. What is the cost to the grower of an emissions standard that forces the grower onto the lower
isopleths at bundle D?
d. What would be the costs to the grower if water were taxed in such a way as to make him choose
bundle D?
(6pts) The Clean Air Act is a model of how to regulate air pollution. In a short (max 3 pages of a large
bluebook) essay:
a. Explain the major parts of the Act and how the act works.
b. What is grandfathering and how did that create difficulties in cleaning up coal fired power plants
in the George W Bush presidency.
c. Green house gasses are now being regulated with the Act. Do you think this will work well?
Why or why not?
(8 pts) Identify an industry that pollutes and a group that would benefit from their abating their pollution.
For each part you will need to write a explanation that refers to your diagram
a. Now draw a diagram with marginal benefits and marginal costs of abatement. What are these
curves and where could they come from (or how would you estimate them, if that is easier) ?
b. What is the social optimal on your diagram?
c. Now suppose that government assigned an abatement target that was not optimal. What would be
the deadweight loss?
d. If the government permitted the industry and those who benefitted from abatement to trade
abatement for money, what do you think would happen? (Think of Coase when you answer this
last part!)
(6pts) Draw a diagram and explain:
a. Why P = MC for a competitor
b. Long run competitive equilibrium
(7pts.) Plastic bags do not all end up disposed of properly. Some blow away and kill both marine and
terrestrial animals. Write brief version of a contingent valuation survey instrument to find the willingness
to pay to ban plastic bags. The objective is to write a sentence for each part of the survey. For example,
the first point might be: 1. The survey would begin by describing the problem of plastic bags killing
animals. (This question does not ask how to implement the survey or how to use it to estimate WTP, it
only asks you to construct the survey itself.)
860
Water (mm/hectare)
840
820
A
800
Original Pollution
D
780
Lower Pollution
760
740
120
130
140
150
180
170
160
Nitrogen (kg/hectare)
190
200
210
220