ECON 2317 University of Winnipeg Economics Worksheet
Description
Consider an emission tax and an emission standard as regulatory policies.
a. Which policy, an emission tax or an emission standard, provides a greater incentive to the polluters to undertake research and development to reduce MAC? Assume the policy (that is, the tax rate or the standard), cannot be changed once the innovation has occurred. Illustrate your answer using any relevant diagrams.
b. Now suppose the policy (that is, the tax rate or the standard), can be changed optimally by the government once the innovation has occurred. Show the optimal tax rates and emission standards before and after the innovation on your diagrams. Under this new assumption, which policy, an emission tax or an emission standard, provides a greater incentive to the polluters to undertake research and development to reduce MAC
2. Suppose that there are 3 sources of emissions in the economy. The marginal abatement cost of each source is given by MAC = 20 E. Suppose MD = 20 E.
a. Write down the equation for the aggregate MAC. Show your working.
b. Draw a diagram depicting the aggregate MAC and the MD curves.
c. Calculate the socially efficient emission level, E*. Label E* on the diagram you drew in part (b).
d. Consider an emission tax. Calculate the tax rate, T*, that must be imposed to achieve the socially efficient level of emissions, E*.
e. Consider an aggregate emission standard set at E*. Calculate the amount that each source should emit in order for the aggregate standard of E* to be implemented in the most cost-effective manner possible
Consider a case where the policy-maker estimates the aggregate MAC curve to be given by MACE = 7-5E, when the true aggregate MAC curve is given by MACT = 9-5E. The policy-maker observes the true MD curve for society which is given by MD = E.
a. Draw a diagram showing the MD curve, MACE and MACT. Clearly label on the diagram the emission level that the policy-maker estimates to be socially efficient, E1, and the emission level that is truly efficient, E*.
b. Which policy, an emission tax or an emission standard, leads to a lower deadweight loss? Explain your answer using the diagram you drew in part (a).
Suppose for a public good, there are 5 consumers each with marginal willingness to pay
given by MWTP=1-2Q. The marginal social cost is given by MSC=5Q.
a. Compute the socially optimal output level.
b. Briefly describe two characteristics of public goods. Explain why the socially
optimal output level of a public good may not be produced by the market.
Consider the following table, where x is an unknown dollar amount.
Project 1
Benefit ($) Cost ($)
Year 0 100 x
Year 1 70 50
Year 2 80 50
a. Suppose the discount rate is given by r=2%. Suppose that the net present value
(that is the present value of the benefits less costs) of Project 1 is 25. What is the
value of x?
b. Suppose the discount rate is given by r>2%. Suppose that the net present value
(that is the present value of the benefits less costs) of Project 1 is 25. Is the value of
x greater than or smaller than that in (a) above?
Suppose there are only two polluting firms, called A and B, with the following marginal
abatement costs: 160 2 A A MAC = ? e and 100 B B MAC = ? e , where A e represents firm As
emissions in tons and B e represents firm Bs emissions in tons. Suppose the government
wishes to ensure that the two firms together emit 60 tons of the pollutant and uses a
Tradable Emission Permit (TEP) policy. Assume that each TEP allows its holder to emit 1
ton, and that the market for permits is perfectly competitive.
a. Suppose the government initially distributes the total number of TEPs it issues
equally between the two firms. The permits are distributed free of charge. Once
trade in permits takes place, what will be the equilibrium in the market for TEPs
(i.e. which firm will buy how many TEPs from the other, and at what price)?
b. Briefly describe three problems of setting up a TEP market.
a. Which policy, an emission tax or an emission standard, provides a greater incentive to the polluters to undertake research and development to reduce MAC? Assume the policy (that is, the tax rate or the standard), cannot be changed once the innovation has occurred. Illustrate your answer using any relevant diagrams.
b. Now suppose the policy (that is, the tax rate or the standard), can be changed optimally by the government once the innovation has occurred. Show the optimal tax rates and emission standards before and after the innovation on your diagrams. Under this new assumption, which policy, an emission tax or an emission standard, provides a greater incentive to the polluters to undertake research and development to reduce MAC
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ECON 2317: Environmental Economics
Assignment 2: due 24 November 2021
Submission Instructions: Your solutions should be handwritten (not typed) on paper. Please number
all pages, scan the pages serially in portrait orientation, and save as a single PDF file. The PDF file
must be uploaded through the appropriate link on Nexus under Assessments/Assignments before
midnight on 24 November. You are responsible for submitting the correct file with your solutions.
Please double check that you have uploaded the correct file on Nexus.
Question 1 (12 marks = 5+2+5)
Suppose there are two sources of emissions in the economy. The marginal abatement cost of source 1
is given by MAC1 = 100 10 E1. The marginal abatement cost of source 2 is given by MAC2 = 50 10
E2.
a) Suppose the regulator wishes to restrict aggregate emissions to 10 units, that is, E1+E2 = 10.
Calculate the amount that each source should emit, ?1 and ? 2, in order for the aggregate
emissions of 10 to be reached in the most cost-effective manner possible.
b) Suppose the regulator uses an emission tax. Calculate the per unit emission tax that the
regulator should implement such that the sources emit ? 1 and ? 2 as calculated in part (a).
c) Briefly describe two limitations of using emission standards and two limitations of using
emission taxes.
Question 2 (6 + 2 + 2 = 10 points)
Consider a situation where there is a single polluter and a single victim of pollution.
a) Can assigning property rights to one of the parties (polluter or victim) help society move
towards the efficient outcome? If so, explain in detail how property rights work towards
achieving this end. Does it matter which party the property right is assigned to? Provide any
relevant diagrams to support your answer.
b) Briefly explain two limitations of using property rights to solve environmental problems.
c) Why are property rights categorized as a decentralized policy? Explain the main advantage of
a decentralized policy over a centralized one.
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University of Winnipeg
ECON 2317: Environmental Economics
Midterm Exam
Date: 25 October 2021
Time: 2.30pm 3.45pm
General instructions:
This is a closed book exam. This exam consists of 3 pages. Answer all the questions below.
You can use paper (not electronic) dictionaries during the exam. Apart from basic
calculators, joining the Zoom meeting and scanning and uploading your solutions, use of
electronic devices is prohibited during the exam.
Your solutions should be handwritten (not typed) on paper. Please number all pages,
scan the pages serially, and save as a single PDF file. The PDF file must be uploaded
through the appropriate link on Nexus Assessments/Assignments folder.
If you have a question, click Ask for help at the bottom of the meeting window.
At 3.45pm, the proctors will tell you to stop writing the exam and begin uploading your
answers (if you havent already done so). You must stop writing at this time. Please stay
in the Zoom meeting with your webcam on during the submission process.
When you finish the exam, please scan and submit your exam on Nexus. You are
responsible for uploading the correct file with your solutions to the exam. Please
double check that you have uploaded the correct file on Nexus. Your uploaded file
will be automatically time stamped by Nexus. Once you have verified that you have
uploaded the correct file, you may leave the Zoom meeting.
If you have any issues uploading your exam, let the proctor know about this immediately
by using the Zoom chat.
If you are disconnected for any reason, please re-connect ASAP. If it is a longer
disconnection, please immediately email a.raychaudhuri@uwinnipeg.ca.
See questions on next page.
1
1. Consider a pollutant. The marginal damage (MD) to society from the emissions (E) of
this pollutant is given by MD = 5 E. The aggregate marginal abatement cost is given by
MAC = 100 10 E. All diagrams should be drawn and labeled clearly.
a. Draw a diagram with E on the horizontal axis, showing the graphs of both the
aggregate MAC and MD.
b. Calculate the socially efficient level of emissions, E*. Show E* on the diagram you
drew in part (a).
c. Show clearly by labeling the relevant areas on the diagram you drew in part (a), the
total benefit to society, total cost to society and the net benefit to society of abating
emissions such that exactly E* level of emissions occurs.
d. Suppose, due to technological improvement, the aggregate MAC changes to MAC2 =
50 5 E. Calculate the socially efficient level of emissions after the new technology
is implemented, E1*. Draw a new diagram with E on the horizontal axis, showing the
graphs of MAC1, MAC2 and MD. Show E* and E1* on the diagram. Show clearly by
labeling the relevant area on the diagram, the net benefit to society (if any) of moving
from E* and E1* after the new technology is implemented.
(3+3+3+5 = 14 points)
2. Consider the following table. Suppose the discount rate is given by 5%. Suppose that the
net benefit in Year 1 is received immediately while the net benefit in Year 2 is received
after one year.
Year 1
Year 2
Project 1
Net Benefit ($)
$100 with probability 70% and $(-10) with probability
30%
$70
Project 2
Net Benefit ($)
Year 1
$100 with probability 50% and $0 with probability
50%
Year 2
$70
a. What is the expected present value of net benefits of each project? Show all your
working. Which project will a risk-neutral policy maker choose?
b. Which project is a risk-averse policy maker more likely to choose? Explain why.
(5+2 = 7 points)
3. Suppose consumer As demand for a good (which is a private good) is given by:
Qa = 100 5 P. Suppose that society consists of 10 people with demand identical to As.
a. Calculate As marginal willingness to pay (MWTP) for 2 units of the good.
2
b. Calculate the aggregate demand (or aggregate MWTP) for society.
c. Suppose the marginal social cost of producing this good is identical to the marginal
private cost of producing this good, and is given by MC = 3Q. Calculate the
equilibrium quantity of the good sold in the market. Does the equilibrium quantity
maximize the net benefit to society?
d. Suppose the marginal social cost of producing this good is given by MSC = 3Q, and
the marginal private cost of producing this good is given by MPC = 2Q. Calculate the
equilibrium quantity of the good sold in the market, Q*. Please draw the relevant
diagram to illustrate the MPC, MSC, aggregate MWTP, and Q*. Please also show on
your diagram the socially efficient quantity, Qopt, and the deadweight loss if Q* is
produced.
(2+2+5+6 = 15 points)
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ECON 2317: Environmental Economics
The University of Winnipeg
Assignment 1: due 29 September 2021
Submission Instructions: Students must submit their solutions to the assignment through the link
provided on the Nexus Assessments/Assignments site by the specified deadline. Please note that the link
for submission will be disabled after midnight on 29 September, and students will not be able to submit the
solutions after that time. Students should write their answers on paper, scan their answers and save as a
PDF file. The PDF file must be uploaded through the appropriate link on this site. All pages must be
numbered, and all scans should be in portrait orientation.
1. Briefly explain the following:
a. What do economists mean by an externality? Give two examples of externalities.
b. Draw a production possibility curve with market goods on the vertical axis and environmental
quality on the horizontal axis. Using this diagram, briefly describe the opportunity cost to
society of attaining a higher level of environmental quality.
c. Using a diagram with the relevant production possibility curves, briefly describe how the
implementation of cleaner technologies affects the tradeoff to society of attaining a higher level
of environmental quality.
d. Using a diagram with the relevant production possibility curves, briefly describe the concept of
intergenerational equity.
e. Consider two countries, A and B. Country A has a higher marginal willingness to pay curve for
environmental quality. Does this necessarily mean that people in A value a cleaner environment
more than people in B? Explain why or why not?
(5 x 5 = 25 points)
2. Suppose consumer As demand for a good is given by Qa = 100 5 P. Suppose that society consists of
2 people with demand identical to As. Calculate the aggregate demand for society. (2 points)
3. Consider the following diagram for Good X showing the marginal social benefit (MSB) and the
marginal social cost (MSC).
1
a. Re-draw the above diagram and label the socially efficient (or optimal) output level on the
diagram as QOPT.
b. Suppose that the level of output produced is 0 < QOPT < Q1. That is, Q1 represents a positive
output level that is greater than QOPT. In the diagram you drew for part (a), show the areas that
represent the following:
(i) the total benefit of producing Q1
(ii) the total cost of producing Q1
(iii) the net benefit of producing Q1
(iv) the deadweight loss associated with producing Q1
(1+ 4 = 5 points)
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Sanchit
ECON-2317 Final exam 2021 Fall.pdf
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5. Suppose there are only two polluting firms, called A and B, with the following marginal
abatement costs: MACA = 160-2e, and MAC = 100-es, where e, represents firm A's
emissions in tons and eg represents firm B's emissions in tons. Suppose the government
wishes to ensure that the two firms together emit 60 tons of the pollutant and uses a
Tradable Emission Permit (TEP) policy. Assume that each TEP allows its holder to emit 1
ton, and that the market for permits is perfectly competitive.
a. Suppose the government initially distributes the total number of TEPs it issues
equally between the two firms. The permits are distributed free of charge. Once
trade in permits takes place, what will be the equilibrium in the market for TEPs
(i.e. which firm will buy how many TEPs from the other, and at what price)?
b. Briefly describe three problems of setting up a TEP market.
(5 x 2 = 10 points)
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