Final Examination
Shorter Answers(Answers to the short questions should not require more than a paragraph or so, and in some instances a figure or two.)
1. Economic efficiency is one of the underpinnings of the arguments for a market economy. What does economic efficiency mean? Illustrate with supply and demand curves a point where a market is operating efficiently.
2. From a practical perspective the optimal level of pollution is not zero. Why is it not practical to aim for zero pollution? Illustrate howthis non-zero outcomecan be efficient.
3. Certain renewable sources of energy are becoming cheaper and cheaper. For example, this chart from the Department of Energy, a federal agency, shows solar becoming cheaper.
For a given demand curvefor solar energy, illustrate the effect of shifts in the supply curve suggested by the chart showing the plummeting cost of solar PV.
4. Why does Stephen Smith (Environmental Economics) argue for regulation of pollution reduction through the market mechanism as opposed to 'command and control' regulation? Do you agree with his argument and why or why not?
5. Wastewater runoff from a poultry farm affects both the neighbors and a nearby stream. Answer the following:
a. The nature of the external costs imposed.
b. The outcome in the absence of government intervention or a private deal
c. The socially optimal (efficient) outcome.
6. One of the arguments some make against cap-and-trade (tradeable permits) is that polluters who can reduce their emissions get to profit from having been a polluter by selling their permits to other firms for which pollution reduction would be very costly, certainly above the cost of a permit on the market. How do you assess the argument that polluters shouldn't profit from reducing their pollution and selling their excess permits?
Longer answers
1. It is not uncommon that hikers andmountaineers get in trouble in the back county. At one time, rescue came if at all when a party failed to check in back at a ranger station, cars remained in a parking area too long or the absence of one or more of the party triggered a frantic call to authorities from a friend or a family member. Now cell phones at times trigger a rescue.
Rescue is not cheap. Whether from the perspective of opportunity cost or actual cost, the tools and personnel involved in rescue mount up. One recent example -"2 women hikers missing near North Bend found ‘cold but safe.'" https://www.seattletimes.com/seattle-news/eastside/search-launched-for-2-hikers-missing-near-north-bend/. Eleven teams were involved in the search for the missing couple. There is the sometime human cost of a search - notably those occasions when searchers themselves are injured or perish in a rescue or recovery operation.
As you might imagine, there are those who argue that if those rescued were charged the full or nearly the full cost of the rescue, people would have a disincentive from putting themselves in situations for which they are ill equipped.
Using economic concepts and methods from Environmental Economics, write an analysis of a rescue. What are the costs and benefits of a rescue? (Enumeration is fine. Numbers, if you find them, will be welcome.) Can you identify any external costs and/or benefits of a rescue? Who should bear the direct costs of a rescue? For example, is it fair for people who don't take risks in the outdoors to pay taxes in support of those who go into areas that are too much for them? Where do you come down on charging for rescues and why?
2. Incandescent bulbs are no longer produced in this country though they are still available. Your browser will lead you to the market for them. For the most part, the LCD bulb has replaced the incandescent. In the attached excel spread sheet, you have all the data you need to calculate the costs of the two bulbs, their purchase and use. At what point in time does the more energy efficient LCD ‘pay for itself' and become less costly than the cheaper incandescent bulb?
3. A generous donor to Evergreen is willing to support a program in aviation. She will donate a few planes and support a couple of aviation instructors and a mechanic. A plane would support, for example, a program in arachnidology. How? Baby spiders go aloft on sails made of silky web material. Studies of which types of spiders fly at various heights are at their earliest stages. A plane could also support a program ingeographic information systems (GIS).
All the College has to do is create space for a landing strip and hangars. This would mean cutting down just 60 acres of trees on the campus. Identify all of the consequences - benefits and costs - that you can enumerate. Any quantitative information you can provide will be welcome. Accept the funding and the conditions for the flight program or not - your call. And why.
4. In the United States, 2007 was a bad year for growing wheat. And as wheat supply decreased, the price of wheat rose dramatically, leading to a lower quantity demanded (a movement along the demand curve). The following describes what happened to prices and the quantity of wheat demanded.
a. Using the midpoint method, calculate the price elasticity of demand for winter wheat.
b. What is the total revenue for wheat farmers in 2006 and 2007?
c. Did the bad harvest increase or decrease the total revenue of US wheat farmers? How could you have predicted this from your answer to part a?
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2006
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2007
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Quantity demanded (bushels)
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2.2 billion
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2 billion
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Average price (per bushel)
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$3.42
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$4.26
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(Source: Krugman)
5. Jose Goldemberg (Energy: What Everyone Needs to Know) writes of the results of a European Union study that found externalities in the production of energy were on the order of 40 to 70 billion euros. The analysis suggested that, "if included in energy prices, identified externalities would double the cost of producing electricity from coal or oil and increase the cost of electricity production from gas by 30%"
(a) If somehow (whether through a market for pollution credits or a tax), you could make firms internalize these costs, what are effects you might anticipate on other, renewable forms of energy production?
(b) Let's assume that other forms of energy production cannot completely replace the indicated externality-generating sources of power in the foreseeable future.
That firms have internalized the costs doesn't mean the firms will eat the costs. Realistically, energy prices would rise. What argument would you make that consumers of energy generated by externality-generating sources of energy should (or should not) be paying a higher price for the energy they are consuming?