RES-ECON 162 Lecture Notes - Lecture 13: Moodle, Tech 3

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14 Apr 2017

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Intro- the switch from command and control policy to incentive-based policy. An emission tax is the easiest form of the incentive-based policy. When you have uncertainty and asymmetric info, things get complicated. Uncertainty- firm does not know marginal abatement cost. Asymmetric info- when someone knows more about information than someone else. As long as the mac is lower than the tax- the firm will reduce its emissions. It is cheaper for the firm to bear the additional abatement cost of reducing emissions than to pay the tax. On the other hand: as long as mac is higher than the tax, the firm will not control its emissions (its cheaper to pay the tax than to control the emissions) If the environmental authority knows the firm"s mac it can induce any level of emissions it wants by choosing the appropriate tax.

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Question: Suppose that a given district has two massive aluminium smelters, smelter 1 and smelter 2, that t...

Suppose that a given district has two massive aluminium smelters, smelter 1 and smelter 2, that transform âaluminaâ (extracted from bauxite) into aluminium. So the smelters use alumina as an input, but its use leads to emissions of aluminium flourides (F) as particulates into the air, creating health problems for some residents in the districtâs nearby city.

Suppose next that the district government cannot reliably observe the individual F emissions of the two smelters, only the overall F_Total. However, the government can reliably track the individual smelterâs use of the alumina input, A₁ and A₂, in metric tonnes.

a. Suppose aggregate MAC =600000 â 1000F_Total, and MAB = 500 F_Total.

Please identify the socially optimal level of F_Total. Show your work.

Ftotal=400

b. If the two smelters just look to their own profits, what will F_Total be?

MAC=0 600,000-1000Ftotal=0 Ftotal=600

c. Suppose that government scientists have a good estimate of the relationship between alumina use and total F air pollution: F_{Total = .001}(A₁ + A₂)

What must the combined level of alumina inputs (A₁ + A₂) be capped at to achieve the socially optimal F_Total from part (a)?

400=0.001(A1+A2) A1+A2=400,000

d. We can express the two smeltersâ aggregate MAC over F as their aggregate MAC over the use of A. If MAC = 600000 â 1000F_Total = 600000 â 1000*.001(A₁ + A₂) = 600000-1(A₁ + A₂)=600000-A_Total.

At what tax per metric tonne of A would the two smelters cut back to a combined purchase of the socially optimal level of A_Total*?

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e) Suppose that smelter 1âs newer production techniques are such that it doesnât need nearly as much alumina as smelter 2 to be viable, but finds it far more costly to reduce its use of the input:

MAC₁ = 600000 â 6A₁

MAC₂ = 600000 â 1.2 A₂

How would the two smelters respond to a tax of $200,000 per tonne of A?

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f) what is the A reduction cost borne by the two smelters individually as a result of the tax, and thus the total reduction cost?

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g) Next suppose that the district government thinks a tax on purchases of A is too complicated to administer, or unpopular with the smelters. Instead, it just says that âneither smelter may use more than 200,000 tonnes of alumina.â

What would the resulting total level of A use be from the two smelters, given their particular MAC curves? What would the total A reduction cost be of this policy?

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2a. F_Total* = _________________.

2b. If both firms pay nothing for emissions, then when maximising profit F_Total = ______________.

2c. To achieve the F_Total* found in 2a), A_Total* = _________________.

2d. The two smelters would cut back to A_Total* at a tax of $ per tonne.

2e. At the tax found in 2d), Smelter 1 would choose A₁* = ___________ tonnes of alumina.

At the tax found in 2d), Smelter 2 would choose A₂* = ___________ tonnes of alumina.

2f. The cost of reducing A₁ use to Smelter 1 under this tax is $ ______ . (This does not

include the tax paid by Smelter 1 to the government for the A it continues to use.)

The cost of reducing A₂ use to Smelter 2 under this tax is $ . (This does not

include the tax paid by Smelter 2 to the government for the A it continues to use.)

So the total A reduction cost from the tax is $ ____ .

2g. With the uniform rule of a 200,000 cap in A use, Smelter 1 would use A₁ = ___________.

Smelter 2 would use A₂ = ______________. So the total A use would be ______________.

The cost of reducing A₁ use to Smelter 1 under this rule is $______________.

The cost of reducing A₂ use to Smelter 2 under this rule is $______________.

So the total A reduction cost from this rule is $________________.

Question 11 One potential remedy to the tragedy of the commons is to: never allow a single individual to consume more than one percent of the common resource. criminalize the usage of common resources. allow individuals to use a common resource as long as they receive some benefit from doing so. place a common resource under private ownership. 4 points Question 12 As a result of a positional externality: contestants have a tendency to invest in a series of mutually offsetting investments in performance enhancement. there is generally an underinvestment in performance enhancement. the market price of performance enhancement materials is too high. the quality of performance in competitive situations is lower than the socially optimal level. 4 points Question 13 Which of the following statements is true regarding health insurance? Economics shows that all health related procedures should be free to individuals because the health of an individual is priceless. Total economic surplus would be larger if individuals faced an incentive to only use services when the benefit exceeds their costs. Health maintenance organizations provide an incentive for doctors to prescribe expensive nonessential services. First dollar insurance coverage has likely had very little to do with rising healthcare expenditures since World War II. 4 points Question 14 A strategy that yields a higher payoff no matter what the other players in the game choose is known as a: prisoner's strategy. dominated strategy. dominant strategy. Nash strategy. 4 points Question 15 Based on the diagram below, if the costs of hospital care are constant at $200 per day, and the individual does not incur any cost for each day for hospital care, then: the individual will stay 7 days and there will be no loss in economic surplus. the individual will stay 3 days and there will be no loss in economic surplus. the individual will stay 7 days and there will be lost economic surplus. the individual will stay 3 days and there will be lost economic surplus. 4 points Question 16 Economic research by Manning and colleagues suggests that people with deductible health insurance policies: spend substantially less on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially more on health care and have substantially better health outcomes compared to people with first-dollar insurance coverage. spend basically the same amount on health care and have substantially worse health outcomes compared to people with first-dollar insurance coverage. spend substantially less on health care and have no measurable difference in health outcomes compared to people with first-dollar insurance coverage. 4 points Question 17 An efficient program for reducing pollution is one for which: all polluters incur the same total costs of abatement. all polluters pay the same amount in taxes to the government. all polluters have the same marginal costs of abatement. all polluters reduce their emissions by the same amount. 4 points Question 18 Given the information on pollution abatement costs of the two firms shown below, which of the following is an efficient combination of pollution reduction? Quantity of pollution abatement Firm A's MC of abatement Firm B's MC of abatement 1 $30 $25 2 $35 $30 3 $40 $35 4 $45 $40 Firm A reduces by 1 ton and Firm B reduces by 1 ton. Firm A reduces by 2 tons and Firm B reduces by 3 tons. Firm A reduces by 4 tons and Firm B reduces by 1 ton. Firm A reduces by 3 tons and Firm B reduces by 2 tons. 4 points Question 19 All of the following are characteristics of perfectly competitive markets except: there are a large number of firms. productive resources are mobile. all firms produce a differentiated product. buyers and sellers are well informed. 4 points Question 20 An advantage of the auction method to pollution abatement is that: it is very expensive to firms. regulators can achieve a desired abatement target without having detailed knowledge of the abatement technologies available to polluters. it requires all firms to reduce by exactly the same amount. it assures that eventually society will reach a level of zero pollution emissions. 4 points Question 21 There are 2 firms each emitting 200 tons of a pollutant. Firm A's abatement costs are constant at $20/ton, and Firm B's abatement costs are constant at $40/ton. The government's goal is to reduce pollution by half. If the government auctions 200 one ton permits to the highest bidder: Firm A will purchase all 200 permits. Firm B will purchase all 200 permits. each firm will buy 100 tons. there is no way to know who the highest bidder for any permit would equal. 4 points Question 22 As a result of economies of scale, as output expands: fixed costs are decreasing. average total costs are decreasing. marginal costs are increasing. total costs are decreasing. 4 points Question 23 Generally, when countries open their borders to free trade: both domestic producers and consumers of imported goods gain. both domestic producers and consumers of exported goods gain. domestic producers of imported goods and domestic consumers of exported goods gain. domestic producers of exported goods and domestic consumers of imported goods gain. 4 points Question 24 Which of the following is the best example of a tariff? South Korea bans imports of U.S. beef because of safety concerns. The U.S. requires toys imported from China to undergo testing for lead content. The U.S. imposes a tax on sugar imported from Brazil. The U.S. restricts the quantity of cars imported from Japan. 4 points Question 25 A means-tested program is a benefit program: in which benefits decline as a recipient's earned income increases. in which all individuals must undergo health screening to be eligible for benefits. in which all recipients exclusively receive benefits through in-kind transfers. that only affects the average income of a specific segment of the population. 4 points Save and Submit Click Save and Submit to save and submit. Click Save All Answers to save all answers.

Question 1:

The annual income that can be consumed without diminishing the total capital assets of a nation is

purchasing power parity income.

sustainable national income.

environmental capital stock.

per capita income.

Question 2:

Maintaining the rainforest is very important because

of its absorptive capacity for CO2 emissions.

of maintaining agricultural production of countries dependent on the rainforest such as Brazil.

ensuring a successful land reform policy.

encouraging rainforest settlement of the poor