Each Question Is Worth 15 Points for a Total of 60

EnvEcon 1 / Econ 3 P. Berck Quiz 2 Fall 2004

Directions: Read each question carefully. Write all answers in your blue books. You may use diagrams in your explanations as long as you explain what they show.

Each question is worth 15 points for a total of 60.

1) Short Answers (2-4 sentences for each part)

a) (5 points) Using your readings in the Fields book, identify and explain two regulations implemented under either the Clean Air Act or the Clean Water Act.

b) (5 points) In Krutilla’s “Conservation reconsidered”, he argued that the government must step in to conserve the land because the private owner of the land cannot capture all benefits to the society from preservation. Discuss at least two reasons why the private owners fail to capture the social benefits based on your reading.

c) (5 points) Use a diagram to illustrate the dead weight loss resulting when a firm does not pay the full cost of its pollution. Suggest one policy that could be used to eliminate the deadweight loss and illustrate the policy on your graph. Label your diagram clearly. Carefully explain what you have done.

2) a) (9 points) Show in a standard diagram a typical firm’s short run AC, AVC and MC. In your diagram, choose a price where the firm produces a positive quantity of output. Identify the profit- maximizing quantity, fixed costs, variable costs, total costs and profit at this point of production. Label clearly.

b) (6 points) In a separate diagram draw the standard AC and MC curves of a firm and then mark the price where the profit is exactly zero for the firm and identify the optimal output level in accordance with this price. Without drawing an additional cost curve, identify the variable cost and fixed cost at the point of production. Explain. 3) Refer to Figure 1 and assume that the price of other stuff is $1. Explain your answers. Figure 1

a) (5 points) The government decides to regulate the industry by introducing a TBES based on technology A. After this regulation, what input bundle does the firm choose to produce 1 unit of output? Why?

b) (5 points) Assume that the firm’s cost of production is $5 with the TBES in place. What input bundle would the firm have chosen without the regulation? How do you identify this bundle?

c) (5 points) If the government instead wanted to use an effluent charge to induce the firm to choose the same input bundle as it does with the TBES, what would the charge be? Why?

4) There are three types of electric generating plants whose cost curves are shown in Figures 2a-2c. Currently, only one hydroelectric plant and one nuclear plant exist. Due to permitting difficulties, it is not possible to build new hydro-electric or nuclear power plants. Assume for the purposes of this question that these plants do not decay either (i.e. assume the “long run” for these plants is longer than the horizon being considered). There are currently 10 fossil-fuel plants.

You do not need to draw your diagrams to scale as long as they are labeled clearly and relevant points are identified. HINT: To draw your curves, identify a few relevant points and connect them. a) (9 points) First, assume that there are only fossil-fuel plants and that there are currently 10 of these. Draw the short- and long-run supply curves for the fossil-fuel plant industry. Explain how you found these curves. b) (6 points) Now, include the hydroelectric and nuclear plants. Draw the entire industry’s long-run supply curve. (HINT: It may help to consider each type of plant separately first.) Explain your reasoning.

Figure 2a: Hydroe lectric Figure 2b: Nuclear 30 30

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Figure 2c: Fossil 35

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