Kami Export - Graded Assignment 8

Graded Assignment 8 1. a. In what economic sense is pollution costly? b. In what sense is eliminating pollution costly? Name: ID: c. Explain why the marginal cost of eliminating additional pollution is likely to increase as pollution is eliminated. Be specific. d. Explain why the optimal amount of pollution is unlikely to be zero. Be specific. e. Under what specific circumstances would the optimal amount of pollution be zero? 2. Explain (a graph will help) why each of the following options correctly or incorrectly completes the sentence. "When marginal benefits to society exceed private benefits, option a. the market demand curve lies too far to the right and the price to consumers is too low." option b. the market supply curve lies too far to the right and the market underproduces." option c. the market demand curve lies too far to the left and the price to consumers is too high." option d. the market supply curve lies too far to the left and the market overproduces." 599 Workbook pages may not be reproduced in any form without the written permission of the publisher.

600 Economics and Public Policy: An Analytical Approach Explain why each of the following options correctly or incorrectly completes the sentence. "When marginal costs to society exceed private costs option e. the market demand curve lies too far to the right and the price to consumers is too high. option f. the market supply curve lies too far to the right and the market overproduces. option g. the market demand curve lies too far to the left and the price to consumers is too low. option h. the market supply curve lies too far to the left and the market underproduces. 3. A, B, and C are neighbors. Zoning laws allow C to use his land any way he wishes. C has decided to raise pigs, which will earn him profits of $50,000. Suppose that the next best use of C's land is residential where it could earn $20,000 in profits. a. The minimum payment to C from A or B to quit pig farming is b. Case I: Suppose A is willing to pay $20,000 to end C's pig farming, while B would pay no more than $15,000. If A pays C $20,000 and B pays C $15,000 to stop raising pigs, is this an efficient outcome? Why? c. Case II: IfA and B each pay $15,000, is this an efficient outcome? Explain. d. Who benefits in b? In c? e. Who loses in b? In c? Workbook pages may not be reproduced in any form without the written permission of the publisher.

i. j. 602 Economics and Public Policy: An Analybical Approach In order for the net social benefit to be zero from operating the plant, the annual value of the elec- tricity generated by the power plant would have to = Is market failure a possibility in the situation of the power plant? Explain. 5. Suppose that a steel factory emits sulfur dioxide (SOD. The situation is described in the following table. Emissions reductions (tons) Costs and Benefits to the factory Marginal Cost to the owners of S02 reduction (millions of $) 12 18 30 50 Marginal Benefit to society (but not the owners) of S02 reductions (millions of $) 50 30 18 12 0.5 a. Graph the marginal cost of reduction ("pollution abatement"). Workbook pages may not be reproduced in any form without the written permission of the publisher.

Graded Assignment & < b. Graph the marginal benefit of pollution abatement. 605 c. The optimal level of pollution abatement = . Explain why. d. The Total Cost of Abatement to society at the optimal level = e. The Total Benefit of Abatement to society at the optimal level = you need to go from "marginal" to "total." ) Explain why. f. The level of abatement if there is no government intervention = . Explain why. . (Hint: For both d and e, . Explain why. Workbook pages may not be reproduced in any form without the written permission of the publisher.

6. Graded Assignment 8 < 605 MtBE is an additive to gasoline, but leaky gasoline storage tanks allow it to seep into the ground and pollute ground water. The following data describe the market for MtBE: price per gallon $1 $2 $3 $4 $5 $6 $8 quantity demanded (millions of gallons) 700 600 500 400 300 200 100 quantity supplied (millions of gallons) 300 400 500 600 700 800 900 1000 a. Plot the supply and demand curves and determine the market equilibrium price and quantity. b. Suppose that it has been determined that the MtBE ground water pollution imposes a cost of $2 for each gallon of MtBE added to gasoline. Plot the social cost curve in the above graph and deter- mine the socially optimal quantity of MtBE production. c. To achieve the socially optimal quantity, should the government tax or subsidize the MtBE indus- try? Explain. Workbook pages may not be reproduced in any form without the written permission of the publisher.

606 Econornics and Public Policy: An Analytical Approach 7. Suppose that there are four firms along a river that are disposing of harmful production by-products by dumping them into the river. Firm 1 would be willing to pay $8 to dump a barrel into the river each day. Firm 2 would be willing to pay $6/barrel to dump; firm 3, $4/barrel; firm 4, $2/barrel. a. Plot the "demand for dumping pollution." b. If it is determined that it's safe to dump 3 barrels of by-products per day, the tax on dumping should . Explain why. be c. If, instead of taxing dumping, firms are given "permits to dump," the price per permit if the socially optimal number of permits is allocated and the firms are allowed to freely trade permits will be . Explain why. d. Discuss the advantages, if any, of using "permits to dump" to limit pollution rather than a tax. e. What are the disadvantages, if any, of using "permits to dump" to limit pollution rather than a tax. Workbook pages may not be reproduced in any form without the written permission of the publisher.