University of Alberta
Economics 269
Economics of the Environment
Problem Set 1
Due:
September 29, 2023
Gordon Lee
Question 1 (6 points)
With the Materials Balance Model;
a.
How does population growth affect the balance of flows?
b.
If all goods could be changed overnight so that they lasted twice as long, how would this
change the balance of flows?
Question 2 (20 points)
In the southwest region of Freedonia, four firms surround Lake Baravelli.
These firms are paper
mills, each producing 100 tons of paper per year.
The paper is sold on the national market for $2
per ton, and including all the costs of production, costs for each firm are $1 per ton.
Thus, each
firm earns an economic profit of $1 per ton.
These paper mills require freshwater to operate and
also produce a pollutant, called gunk, which the mills dump into Lake Baravelli.
New paper mills can also locate around the lake and produce at a base cost of $1 per ton.
However,
for each new paper mill
that arrives, the water will become more polluted with gunk
and each firm will have to install a water treatment facility to obtain freshwater.
The extra cost
associated with new plants will raise the costs of paper production at all facilities, including the
new one, by $0.15 per ton for each new mill.
a.
Assume there is open access to the lake.
If paper mills will continue to locate as long as
there are economic profits to be earned, how many new mills will be built?
b.
How many mills maximize total combined profits for the paper producers?
c.
Draw a diagram of the marginal cost and average revenue curves with the number of
mills on the horizontal axis.
Assume that government regulation restricts lake access to
the profit maximizing number of firms.
Show the profits earned by the mills that are
allowed to operate.
d.
Suppose that government reduced the number of mills by one from the number that
would have resulted from open access.
Show that the increase in profits to the remaining
firms is sufficient to compensate the firm denied access for its lost profits.
Question 3 (10 points)
Quoting Anne Elke:
“A solution suggested by Lester Thurow to environmental problems is to impose ZEG.
This solution would achieve allocative efficiency, which as Thurow states is the goal
of most environmental problems.”
Evaluate Anne Elke’s statement 269 section 1
