Exam 2

Due - October 24, 2013 - beginning of class

NOTE: The next two questions should include not only a written explanation, but a graphical and mathematical explanation as well.

1. A new Hampshire textile mill releases pollution into nearby wetlands, and the associate health and ecological damages are not considered in the private market. Suppose you are an environmental economist working with the following marginal benefits and costs for this market, where Q is thousands of pounds and P is price per pound.

D = MPB = 800-0.5Q

S = MPC = 20 + 0.3Q

MEB = 0

MEC = 0.4Q

a. Find the competitive equilibrium, Q_C and P_C, and the Pareto Optimal equilibrium, Q_E and P_E. 10 points

b. What is the value of net social welfare in this model if MEC = 0 and MEB = 0. 10 points

c. If MEC = 0.4Q, is the market over or under producing the product? Explain. What is the value in dead weight loss as a result? 10 points

2. Command and control standards are often used by governments to help control pollution. 10 points each

a. List and explain the three types of standards discussed in class.

b. From an administrative viewpoint, why do government agencies tend to prefer command and control standards?

c. From an economic point of view, why are uniform standards seen as being inefficient?

3. Using a two-polluter model, graphically and in words explain how to determine the cost effective level of pollution control allocation between the two firms. Provide a real world example where this practice might be implemented. 20 points

4. List and explain the four market based approaches to resolving externality problems. Then discuss what situtations might call for a Pigouvian subsidy and what information is necessary to effectively and efficiently implement an appropriate Pigouvian subsidy. 20 points