‭Shrenya Jain‬

‭73756173‬
‭ECON 371 - Problem Set 2‬
‭Due March 15 on Canvas‬

‭PART 1: True/False‬

1‭ . The hedonic price method can be used to estimate neighboring households’ use value for a‬
‭bird sanctuary (a kind of park) in their neighborhood.‬‭True‬

2‭ . Although environmental quality can be considered an attribute of a differentiated product, we‬

‭cannot learn about its implicit value from market prices.‬‭True‬

3‭ . WeBeachmarginal damages (MD) curves vertically because most pollutants are rival bads.‬
‭False‬

4‭ . The steepness and curvature of the MAC curve depends exclusively on how much the firm‬
‭reduces sales.‬‭False‬

5‭ . The general model of pollution control highlights the tradeoff between the benefits of‬
‭producing the goods and services and the environmental damages created by those goods and‬
‭service.‬‭True‬

6‭ . Contingent valuation and a travel cost model are two methods that could be used to value a‬
‭provincial park, i.e., one not close to a residential area and visited by people all over the‬
‭province.‬‭True‬

7‭ . A government regulation that requires fisheries to only capture salmon weighing more than‬
‭3.5 lbs is a type of performance standard.‬ ‭False‬

8‭ . If firms have different marginal abatement costs, an uniform standard is unlikely to be cost-‬
‭Effective.‬‭True‬

9‭ . Market-based instruments are likely to be more cost-effective than standards when polluters‬
‭have information about their abatement costs that is not available to the regulator.‬ ‭True‬

‭10. An increase in the level of an emissions tax will always reduce DWL.‬‭False‬
‭PART 2: Multiple choice (CHOOSE ALL THAT APPLY)‬

‭1. Under a technology standard, firms are _______‬‭a‭_‬ ______.‬

a‭ . incentivized to discover new technologies that abate pollution at a lower cost‬

‭b. required to install a particular pollution abatement technology‬
‭c. required to reduce their pollution to a specified level‬
‭d. unlikely to pursue new technologies that abate pollution at a lower cost‬

2‭ . Houses A, B, and C are identical except for their location. House A is located next to Kitsilano‬
‭beach and a public park, while house B is near a noisy bar. House C is next to all: Kitsilano‬
‭beach, a public park, and the noisy bar. House A is valued on the market at $800,000, house B is‬
‭valued at $500,000, and house C is valued at $620,000. Based on this information, what is the‬
‭market value of being near a noisy bar? (CHOOSE ONE)‬

a‭ . -$180,000‬
‭b. -$120,000‬
‭c. $0‬
‭d. $120,000‬
‭e. $300,000‬

3‭ . Suppose both a chemical company and a commercial fishery operate on the same river. The‬
‭chemical company produces effluent that reduces the number of fish, harming the fishery's‬
‭profits. According to the Coase Theorem the socially efficient level of emissions could be‬
‭reached through bargaining between the two parties if which of the following conditions were‬
‭met? (CHOOSE ALL THAT APPLY)‬

a‭ . negotiation costs are low‬

‭b. negotiation costs are high‬
‭c. property rights are clearly defined‬
‭d. the cost of abatement is under 20% of the chemical company's profits‬
‭e. there is a government regulator to tax the chemical company‬

4‭ . Cap and trade systems provide ___‬‭c‭_‬ ___ incentive(s) to invest in R&D to find cheaper‬
‭methods of reducing emissions, compared to emission taxes that achieve the same level of‬
‭abatement.‬

a‭ . zero‬
‭b. a lower‬
‭c. a greater‬
 ‭d. Similar‬

‭PART 3: Short questions‬

1‭ .‬‭a. National park visit prompt: The following table captures annual visits from three cities to a‬
‭nearby park. What minimum value for this park does this table imply?‬

‭Origin‬ ‭Population‬ ‭No. of Visits‬ ‭Visits/p‬ ‭Trip Cost‬

‭A‬ ‭4500‬ ‭9000‬ ‭2‬ ‭8‬

‭B‬ ‭1500‬ ‭6000‬ ‭4‬ ‭6‬

‭C‬ ‭2000‬ ‭16000‬ ‭8‬ ‭2‬

‭b.‬
b‭ . Refer to the National park visit prompt above to answer this question. Now consider an‬
‭increase in entrance fee by $2 per visitor. What would be the predicted number of visits per‬

‭Answer:‬

a‭ . To find the minimum value for the park, wen eed to identify the city that contributes the least‬
‭to the park's value. We can calculate the "Value Contribution" by multiplying the "No. of Visits"‬
‭by the "Trip Cost" for each city. The minimum value corresponds to the city with the smallest‬
‭contribution.‬

‭calculate the value contribution for each city:‬

‭ ity A: 9000 * 8 = 72,000‬

C
‭City B: 6000 * 6 = 36,000‬
‭City C: 16000 * 2 = 32,000‬
‭So, the minimum value for the park comes from City C with a value contribution of 32,000.‬

b‭ . Now, considering an increase in entrance fee by $2 per visitor, we need to adjust the "Trip‬
‭Cost" for each city and then recalculate the predicted number of visits per the new "Trip Cost."‬

‭New "Trip Cost" = Old "Trip Cost" + $2‬

‭ ity A: 8 + $2 = 10‬
C
‭City B: 6 + $2 = 8‬
‭City C: 2 + $2 = 4‬
‭Now, calculate the predicted number of visits per the new "Trip Cost" using the formula:‬
‭Predicted Visits = No. of Visits / New "Trip Cost"‬

‭ or City A: 9000 / 10 = 900‬

F
‭For City B: 6000 / 8 = 750‬
‭For City C: 16000 / 4 = 4000‬
‭So, the predicted number of visits per the new "Trip Cost" would be 900 for City A, 750 for City‬
‭B, and 4000 for City C.‬

2‭ . Rose question prompt:‬‭Consider a large number of farms competing to sell roses on an‬
‭island. The marginal cost of producing roses R is MC = 40 + R. The marginal benefit of buying‬
‭roses is given by MB = 120 − 3R. Unfortunately, the rose producers use a fertilizer which causes‬
‭health problems for the people on the island. Marginal damages from these health problems are‬
‭given as MD = R.‬

a‭ . Compute the competitive equilibrium quantity in this market.‬

‭b. The social marginal cost of producing roses can be written SMC = [X] + [Y] R. (Fill in both‬
‭blanks.)‬
‭c. Compute the social optimum quantity of roses.‬
‭d. Compute the DWL in the competitive equilibrium.‬
‭e. Plot MC, MB, SMC, and SMB.‬

‭Answer:‬

a‭ . The competitive equilibrium quantity is determined where the marginal cost (MC) equals the‬
‭marginal benefit (MB):‬

‭ C=MB‬
M
‭40+R=120−3R‬
‭Combine like terms and solve for R:‬
‭4R=80‬
‭R=20‬

‭So, the competitive equilibrium quantity is R=20.‬

‭b. The social marginal cost (SMC) can be written as:‬

‭ arginal cost of production + Marginal damages‬

M
‭SMC=Marginal cost of production + Marginal damages‬
‭SMC=MC+MD‬
‭ MC=40+R+R‬
S
‭SMC=40+2R‬

‭ o,‬
S
‭[X]=40 and [Y]=2.‬

c‭ . The social optimum quantity is determined where the social marginal cost (SMC) equals the‬
‭marginal benefit (MB):‬

‭ MC=MB‬
S
‭40+2R=120−3R‬

‭ ombine like terms and solve for R:‬

C
‭5R=80‬
‭R=16‬

‭So, the social optimum quantity is R=16.‬

d‭ . The Deadweight Loss (DWL) in the competitive equilibrium is the difference between the‬
‭social optimum quantity and the competitive equilibrium quantity:‬

‭ ocial Optimum Quantity − Competitive Equilibrium Quantity‬

S
‭DWL =Social Optimum Quantity−Competitive Equilibrium Quantity‬
‭DWL=16−20=−4‬
‭Therefore, the Deadweight Loss in the competitive equilibrium is 4‬

‭e.‬
3‭ .‬‭Suppose a lake enjoyed by three homeowners is cleaned up to the socially efficient level of‬
‭pollution by splitting the cost of cleanup equally among the three homeowners. 1. Describe a‬
‭situation where at least one homeowner would be made worse off by this cleanup policy. 2. In‬
‭the situation you described above, is there an alternative way to allocate costs that would avoid‬
‭this problem? 3. What are the barriers, if any, to achieving this alternative? (250 words or fewer.)‬

‭Answer:‬

‭1.‬ ‭Situation where at least one homeowner would be made worse off:‬

‭ uppose one homeowner was responsible for the majority of the pollution in the lake. In this‬
S
‭case, the socially efficient level of cleanup, when shared equally among the three homeowners,‬
‭might impose a disproportionately high cost on the homeowner who contributed less to the‬
‭pollution. This homeowner would end up paying more than their fair share, making them worse‬
‭off.‬

‭2.‬ ‭Alternative cost allocation to avoid this problem:‬

‭ n alternative way to allocate costs fairly could be based on the principle of "polluter pays." In‬
A
‭this scenario, homeowners would contribute to the cleanup costs based on their individual‬
‭contributions to the pollution. The homeowners who contributed more to the pollution would‬
‭bear a higher share of the cleanup costs, while those with less contribution would pay‬
‭proportionately less. This approach aligns with the idea that individuals responsible for the‬
‭pollution should bear a larger share of the cost burden.‬

‭3.‬ ‭Barriers to achieving this alternative:‬

‭Barriers to implementing a "polluter pays" approach might include:‬

‭ ack of accurate data: Determining each homeowner's exact contribution to pollution may be‬
L
‭challenging, and disputes could arise over the fairness of the allocations.‬

‭ nforcement challenges: Implementing and enforcing a system that accurately assigns costs‬
E
‭based on pollution contributions may require regulatory oversight, which could be‬
‭resource-intensive.‬

‭ ooperation and negotiation: With differing opinions on the degree of individual responsibility‬
C
‭for pollution, achieving consensus among homeowners on a fair allocation system may be‬
‭difficult.‬
‭PART 4: Essay1‬

I‭ n 2023, a multinational mining company expressed interest in extracting lithium from a rich‬
‭deposit in northern Chile, which is also an area of cultural and spiritual significance to the‬
‭indigenous communities residing there. The company believes that the lithium reserves could‬
‭play a pivotal role in advancing renewable energy technologies globally.‬
‭However, the indigenous communities are deeply concerned about the potential environmental‬
‭and cultural impacts of the mining operation. Recognizing the importance of collaboration and‬
‭mutual understanding, the company has initiated negotiations with the indigenous leaders and‬
‭community representatives. They aim to find a solution that respects the rights and traditions of‬
‭the indigenous people while also ensuring the responsible extraction of this valuable resource.‬
‭In two paragraphs, describe what theorem from class is a useful model for considering the case‬
‭study above. Your argument should include a description of how the assumptions of that theorem‬
‭are fulfilled (or not) by the given situation. Should the Chilean government intervene? Support‬
‭your answer using sound economic reasoning and concepts we have discussed in class.‬

‭Answer:‬

‭ ne useful model for considering the case study is the‬‭Coase Theorem‬‭. The Coase Theorem,‬
O
‭developed by Ronald Coase, emphasizes the importance of property rights and efficient‬
‭bargaining in resolving externalities. In this case, the externalities involve potential negative‬
‭impacts on the environment and indigenous culture due to lithium extraction. The Coase‬
‭Theorem assumes well-defined property rights and low transaction costs for bargaining. In this‬
‭situation, if property rights are clearly established and the indigenous communities have the right‬
‭to decide on the use of their land, negotiations between the mining company and indigenous‬
‭leaders could lead to an efficient outcome. The company and the indigenous communities may‬
‭be able to reach an agreement that internalizes the externalities by incorporating environmental‬
‭and cultural concerns into the terms of the extraction.‬

‭ owever, the assumptions of the Coase Theorem may not be fully met in this case. Indigenous‬
H
‭communities may face challenges asserting property rights, and transaction costs could be high‬
‭due to power imbalances and historical injustices. In such instances,‬‭government intervention‬
‭may be justified. The Chilean government could play a role in facilitating negotiations, ensuring‬
‭a fair and inclusive decision-making process, and imposing regulations to mitigate environmental‬
‭and cultural risks. Government intervention should aim to strike a balance between economic‬
‭development and the protection of indigenous rights, considering the long-term sustainability of‬
‭both the lithium extraction industry and the well-being of the indigenous communities. Sound‬
‭economic reasoning suggests that a well-crafted intervention could help align private and social‬
‭interests, fostering a more equitable and sustainable outcome for all stakeholders involved.‬