ECOS3013 Environmental Economics
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ECOS3013 Environmental Economics
Tutorial 11
Practice Questions for Final Exam
1. An economy has two types of firms that contribute GHG emissions to the atmosphere: coal power plants emitting 10 MtC/year (MtC/year = 1,000,000 tons of carbon per year) per facility and cement factories emitting each 1 MtC/year. There are 100 coal power plants and 300 cement factories. The two types of firms are different, but within each sector firms are the same.
(a) Calculate the overall baseline emissions of the economy. If annual emissions should
be reduced to 940 MtC/year, how many MtC have to be abated?
The government decides to implement a cap-and-trade system. It sets an economy- wide cap at 940 MtC/year and auctions off allowances. Abatement costs for each firm in the coal sector are Cl (a) = 5a2 for abating a MtC/year. Abatement costs for each firm in the cement industry are C2 (a) = 6a + 7.5a2 . All costs are measured in million AUD. Assume that there is full competition on the allowance market.
(b) At what price do allowances trade? How many MtC of allowances do firms in
each of the two sectors purchase?
(c) Assume that the abatement costs in the coal industry are Cl (a) = 2a rather than the above costs. How many MtC of allowances does the coal sector purchase? How many MtC of allowances does the cement sector purchase?
(d) Say that instead of implementing a cap-and-trade system the government opted for a carbon tax. What tax (✩ AUD per tC) should the government set to reduce annual emissions to 940 MtC/year?
2. Suppose marginal damages of pollution from coal-fired power stations near Lake Mac- quarie are given by: MD(e) = 0.8e, and marginal savings of the pollution control can be either low: MSL (e) = 42 − 2e, or high: MSH (e) = 42 − e. The NSW EPA is uncer- tain about the marginal savings, but knows they can appear with equal probability.
(a) Obtain the average marginal savings, and graph it along with low and high
marginal savings as well as the marginal damage curve. (2 points)
(b) Obtain the Pigovian tax and the optimal pollution levels for the low, the high,
and the average marginal savings scenarios (2 points)
(c) Calculate the expected efficiency loss with tradable permits. (2 points)
(d) Calculate the expected efficiency loss with a uniform emission fee. (2 points)
3. A firm producers paper at cost C(q) = q2 , where q is a ton of paper, and sells it in a competitive market for ✩10 per ton. In addition, 2 units of pollution, e, are emitted for each ton of fertilizer produced. Pollution damages are ✩2 per unit of emission.
(a) In an unregulated market, how many tons of paper does the firm produce and
what are the firm’s profits? (2 points)
(b) In the regulated market, how many tons of paper does the firm produce, how
much does it pay in emission fees, and what are the firm’s profits? (3 points)
(c) In the regulated market, a devise has been invented that can half the firms’ current emissions. How much would the firm be willing to pay for such a devise? (2 points)
4. Eleanor and Tahani are neighbours. Eleanor owns cats and earns money selling funny cat videos online. Tahani has a large garden where she grows lettuce and carrots. The proximity of their houses is convenient for Tahani because the cats kill the rabbits in Tahani’s gargen: one cat kills all rabbits in 10m2 . Unfortunately, there are not enough cats next door to kill all rabbits in Tahani’s garden. Extermination services cost ✩2/m2 . Eleanor has total costs TC = 5C2 + 10C + 18 where C is the number of cats. Each cat yields ✩40 worth of cat videos for Eleanor.
(a) (3 points) How many cats would Eleanor keep if operating independently of
Tahani?
(b) (1 point) What is the value of the positive externality provided by Eleanor to
Tahani?
(c) (3 points) What is the socially efficient number of cats?
(d) (4 points) In the absence of transaction costs, what outcome do you expect will arise from bargaining between Eleanor and Tahani?
(e) (1 point) How high would total transaction costs need to be to erase all gains
from bargaining?
2021-12-24