Assignment:
Please answer all questions (1 to 5):
1. a) Suppose you were asked to comment on a proposed policy to control oil spills. Since the average cost of an oil spill has been computed as $X, the proposed policy would require any firm responsible for a spill immediately to pay the government $X. Is this likely to result in the efficient amount of precaution against oil spills? Why or why not?
b) What is economic efficiency and why do economists emphasize on efficiency as an important goal of public policy? (Hint: Cost benefit analysis, thinking at the margin, net benefit/economic surplus)
2. Draw the demand curve for an environmental service, for example carbon sequestration (process of capture and long-term storage of atmospheric carbon-dioxide) from tree planting, and discuss what its slope means as a measure of willingness to pay for the service (explain the direction of slope). Label the axes on your graphs clearly.
Draw the supply curve for the service and discuss its slope and how it measures the marginal costs of providing increasing levels of the service (explain the direction of slope).
Identify the price, P*, and quantity, Q*, that would satisfy the static efficiency/equilibrium condition. Label the area of net benefit to society, i.e., consumer surplus (CS) and producer surplus (PS).
3. Assume that a mining company that produces ore sells its product for $40 per ton. Also assume that the $40/ton price represents both the private and social benefit per ton. In producing ore, the mining company incurs costs, represented by MPC. Furthermore, the pollution the company generates travels down stream to impose additional "external" costs on society, represented by MEC. Both the private costs to the firm and external costs are as follows.
|
Ore Mined (tons)
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MPC to firm ($/ton)
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MEC ($/ton)
|
|
1
|
$7
|
$5
|
|
2
|
$15
|
$11
|
|
3
|
$24
|
$16
|
|
4
|
$40
|
$26
|
|
5
|
$45
|
$35
|
a. If the firm only considers its private benefits and costs, what level of production will occur?
b. From a social perspective, what's the socially efficient level of production?
c. Are your answers for parts a and b different? If so, explain why?
d. What kind of policy would ensure a social efficient outcome in this case?
4. Why do economists generally prefer revealed preference approaches to environmental benefit valuation over stated preference approaches? Are there cases in which stated preference approaches will be recommended?
5. Should environmental and natural resource management policies be put to a strict benefit-cost test? Why or why not?