May 27 Questions PDF

Preview

Summary

ECON1001 Tutorial...

Description

Tutorial 7 Week 4-2 Chapter 10 – Externalities 1. Externalities - Definition and examples a. What is an externality? b. Define a positive externality and provide an example. In the presence of a positive externality, will the quantity produced by the market be greater or less than the socially efficient level? Show via a graph.

c. Define a negative externality. Provide an example.

2.

Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional tonne of paper imposes a constant external cost of $220 per tonne. The following graph shows the Demand (Private Value Curve) and the Supply Curve (Private Cost) for paper.

a. What is the private market equilibrium quantity?

b. What is the socially optimal quantity of paper production?

c.

What would be the size of a tax governments could impose to create an incentive for the firm to produce the socially optimal quantity of paper?

3. Efficiency in the presence of externalities Parks confer many external benefits on society: open space, trees that reduce pollution, and so on. Therefore, the market equilibrium quantity of parks is not equal to the socially optimal quantity. The following graph shows the demand for parks (their private value), the supply of parks (the private cost of producing them), and the social value of parks (the private value and external benefits).

a. b.

What is the market equilibrium quantity? What is the socially optimal quantity?

4. Correcting for negative externalities - Taxes versus tradable permits Power stations emit sulfur dioxide as a waste product. This generates a cost to society that is not paid for by the firm. Suppose the government wants to correct this market failure by getting firms to internalize the cost of pollution. To do this, the government can charge firms for pollution rights (the right to emit a given quantity of sulfur dioxide). The following graph shows the daily Demand for pollution rights.

Suppose the government has determined that the socially optimal quantity of sulfur dioxide emissions is 245 million tonnes per day. What would be the size of a tax per tonne of sulfur dioxide emitted to will achieve the desired level of pollution? Now suppose the government does not know the Demand Curve for pollution and, therefore, cannot determine the optimal tax to achieve the desired level of pollution. Instead, the government auctions off tradable pollution permits. Each permit entitles its owner to emit 1 tonne of sulfur dioxide per day. To achieve the socially optimal quantity of pollution, the government auctions off 245 million pollution permits. Given this quantity of permits, what will be the price for each permit in the market for pollution rights will be? c.

The previous analysis hinges on the government having good information regarding either the demand for pollution permits or the optimal level of pollution (or both). Given that the appropriate policy (tradable permits or corrective taxes) can depend on the available information and the policy goal, consider the following scenario: The government knows the optimal quantity of pollution as well as how much it costs a particular polluting firm to reduce pollution at each quantity. If this is all the information the government has, which solution to reduce pollution is appropriate: i. corrective taxes, ii. tradable permits?

8. The effects of property rights on achieving efficiency A city has a hiking lodge whose visitors use a river for recreation. The city also has a fish cannery that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the fish cannery's waste decreases the hiking lodge's economic profit. Suppose the fish cannery could use a different production method that involves recycling water. This would reduce the pollution in the river to levels safe for recreation, and the hiking lodge would no longer be affected. Profit Action Fish Cannery Hiking Lodge Total Profits $2,100 $1,100 No Recycling $1,300 $2.300 Recycling a.

Is total economic profit higher with or without recycling?

b.

Suppose the hiking lodge has the property rights to the river. Assuming the two firms can bargain at no cost, will the fish cannery use the recycling method? How much will the fish cannery pay the hiking lodge?

c.

Now, suppose the fish cannery has the property rights to the river. Assuming the two firms can bargain at no cost, will the fish cannery use the recycling method? How much will the hiking lodge pay the fish cannery?

d.

Would the fish cannery will make more economic profit when it has property rights to pollute the river, or when the hiking lodge has property rights to a clean river?

e.

Will the river be polluted no matter who has the property rights?...