EC_371_HW_3_updated

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1 EC 371 Ivan Kandilov Boston University Fall 2023 Homework Set # 3 (Due by 11:59pm on Sun., Nov. 12) 1. Which one of the following statements is true? a) Global proven reserves of oil have steadily declined in recent decades. b) Peak global oil production occurred around 2010. c) Peak oil demand may have already occurred due to the COVID pandemic. d) Per unit of energy, oil produces more carbon emissions than coal. e) The price of oil is less volatile than the price of other energy sources. 2. Which one of the following statements is false? a) China is the world’s largest consumer of coal. b) Coal is the most abundant fossil fuel source globally. c) As a result of the COVID pandemic, global demand for coal may have already peaked. d) Coal is the most environmentally destructive energy source. e) The world’s coal reserves may be depleted within 50 years. 3. About what percent of the world’s energy use comes from fossil fuels? a) 95% b) 80% c) 65% d) 50% e) 40% 4. What is the main reason why some people advocate for an expansion of nuclear energy? a) It is the only energy sources that will never be depleted. b) It is much safer than in the past. c) It is the cheapest energy sources. d) It creates the most jobs per unit of energy. e) It results in low carbon emissions.

2 5. The optimal level of pollution occurs where ... a) total benefits equal total costs. b) marginal benefits equal marginal costs. c) private costs are minimized. d) private benefits are maximized. e) average revenue equals average cost. 6. Annual automobile emissions testing is an example of which type of pollution policy? a) Tradable permits b) Pollution taxes c) Pollution subsidies d) Setting property rights e) Pollution standards 7. An emissions standard will work best in which of the following cases? a) The marginal cost of pollution reduction curve is relatively flat. b) The marginal cost of pollution reduction curve is relatively steep. c) All firms have similar equipment and technology. d) The health effects of a pollutant are relatively unknown. e) Firms have very different equipment and technology. 8. Which one of the following statements is false regarding a tradable pollution permit system? a) Each firm will operate in an economically efficient manner. b) Total pollution levels in a region can be set by the government. c) The price of a permit will vary with changes in technology. d) The permit price is set by the government. e) Social benefits can be maximized. 9. For a pollutant like lead, which causes health effects to local residents even at very low levels, which regulatory approach would be most effective for eliminating any health threats? a) Emissions standards b) Tradable permits c) Pollution taxes d) Pollution subsidies e) Ecolabeling

3 10. Tradable permits are likely to result in less inefficiency, relative to a pollution tax, when ... a) the marginal costs of damages are steep and the marginal costs of pollution reduction are relatively stable. b) the marginal costs of damages are steep and the marginal costs of pollution reduction are steep. c) the marginal costs of damages are relatively stable and the marginal costs of pollution reduction are relatively stable. d) the marginal costs of damages are relatively stable and the marginal costs of pollution reduction are steep. e) the marginal costs of damage are elastic and the marginal costs of pollution reduction are also elastic. 11. As emissions levels stabilize for a stock pollutant ... a) health and other impacts also stabilize. b) health and other impacts begin to decrease. c) health and other impacts continue to increase. d) health and other impacts may increase or decrease. e) health and other impacts are reduced to zero. For Questions 12 and 13 refer to the graph below. Pollution $ Q max B C D A Q tax T 1

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4 12. The graph above shows the marginal pollution control costs per ton for a firm that would pollute at Q max without any regulation. Suppose a pollution tax of T 1 per ton were implemented, with the firm reducing pollution to Q tax . What area(s) would represent(s) the tax paid by the firm? a) A b) A+B c) B d) A+B+C e) B+C 13. The graph above shows the marginal pollution control costs per ton for a firm that would pollute at Q max without any regulation. Suppose a pollution tax of T 1 per ton were implemented, with the firm reducing pollution to Q tax . What area(s) would represent(s) the firm’s pollution reduction costs, not considering the taxes it pays? a) A+B b) A+B+C c) B+C d) C e) D

5 14. The graph above shows the marginal pollution control costs for two firms. Suppose that the two firms must reduce pollution by a total of 50 tons. Initially, each firm is required to reduce its pollution by 25 tons. What areas would represent the two firms’ total pollution control costs without any emissions trading? a) A+B+D b) A+B+C+D c) A+B+D+E d) A+B+C+D+E e) A+B+C 15. Explain how a system of transferable pollution permits works. If all permits are initially allocated equally between two firms, how can we determine which firm will buy permits and which firm will sell permits? Use a graph to support your answer. Why do economists tend to support a system of transferable permits to direct regulation? A B C D E MCR 2 Firm 1 0 25 35 50 Firm 2 50 25 15 0 Pollution Reduction Costs per Unit MCR 1 $ Units of Pollution Reduced

6 16. Suppose the pure rate of time preference is 1%, the growth rate of consumption is 3%, and the elasticity of the marginal utility of consumption is 2. Calculate the value for the social rate of time preference. 17. Briefly describe the difference between risk and uncertainty.

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