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ECON4410
Environmental and Resource Economics

Lab Assignment 1: Welfare economics, BES and Pollution Control

This assignment is based on the first four weeks of materials covering welfare economics, biodiversity conservation and ecosystem services and pollution control. The marks allocated to each question (and sub-questions) are given in the parenthesis. In answering these questions, particularly Q1 and Q3, provide economic reasonings in your answers. Logical interpretation of answers carries higher proportion of marks!

 

Submission instructions: Please submit the assignment report before the due date and time using the Turnitin link provided for this assignment in the LMS (go to the Assignment Hub in the Assessments block > Assignment 1-> Use the Submission Link for Assignment 1). IF you use EXCEL to find solutions, submit the excel file as well using a different submission link (Submission link for EXCEL files). While marking the assignment we would like to see what you have done in one-word document, so copy the relevant columns from excel and paste them appropriately in the word file. You can convert the word file into  a pdf and submit the pdf file. You must use assignment cover sheet and remember to sign in the assignment cover sheet. Also write your name and student ID in the document, so that we can easily identify your submission.

 

Problem set 1 (Welfare economics) 25%

Consider a market for an agricultural commodity, say wheat. Assume that the demand and supply of wheat in the market are approximated by the following supply and demand curves:

QS = 140 + 24P            

QD = 1150 – 26P

 

where QS = quantity of wheat supplied in tonnes (in thousands),

            QD = quantity of wheat demanded in tonnes (in thousands), and

            P = price per tonne of wheat.

 

Using the demand and supply relationships given above:

a) Draw the demand and supply curves for wheat in the market. (4)

b) Determine the equilibrium price and quantity traded for wheat in the market. (4)

c) Calculate the consumer surplus, producer surplus, and cost of production of wheat at the market equilibrium. (5)

 

Now assume that due to conflict in major wheat producing countries, the supply of wheat is restricted, and the supply curve for wheat has been shifted out as: QS1 = 80 + 18P. Assuming no change in demand for wheat:

 

d) Determine the new equilibrium price and quantity of wheat in the market. (4)

e) Calculate the consumer surplus, producer surplus and cost of production of wheat at the new equilibrium. (5)

f) What can you say about the economic impact of conflict on wheat market?  (3)

Problem set 2 (Exploratory problem) 25%

 

Use the UN Biodiversity Lab and Ecosystem Service Layer to answer this question.

a) Explain the nature of the data used to show the distribution of Global Wetlands (tropical and sub-tropical) in your own words. What is the spatial resolution of the map and which spatial units are excluded in the dataset that was used to create the wetland distribution map? (5)

 

b) Use “Download the map” link to see the distribution of wetlands. Name the program that developed the Global Wetlands map. How many categories of wetlands are represented in this map? Name these categories. (5)

 

c) Using the map view, explore the distribution of “Peat” or Peatlands. What is the definition of ‘peat’ for the purpose of this map? Name the top three countries in both ASIA and AFRICA where Peatlands are spatially concentrated. In Australia, which state or territories has the highest concentration of peatlands. (5)

 

d) Use the “Biodiversity” Layer to explore the “Threatened Species Richness” dataset. Answer the following questions based on Threatened Species Richness data.

i. Comment on the distribution of threatened species richness at a global scale. You can comment on it based on the regions or countries. (5)

ii. Comment on the threatened species richness and its distribution in your own country compared to your continent. For Australia and New Zealand, use these countries as part of the Australian continent for the purpose of this question, i.e. if you are Australia, compare the threatened species richness of Australia with New Zealand and vice-versa. (5)

Problem Set 3 (Pollution control) 50%

 

Suppose there are only four firms in the economy. These are the only polluters in the economy and the only organisations able to abate (reduce) pollution. The firms have marginal pollution abatement cost functions given by:

 

C1 = 20 + 10 Q1

C2 = 20 + 5 Q2

C3 = 20 + (10/3) Q3

C4 = 20 + (10/4) Q4

Where Ci and Qi are respectively the marginal abatement cost and the amount of pollution abatement for firm i (in units of tonnes of pollutant).

 

a) Derive the aggregate marginal abatement cost function for these firms? (5)

 

b) Express the aggregate marginal abatement cost function in ordinary form C=f(Q). (4)

 

Now consider the marginal abatement benefits (MAB) function to the society through abatement of pollution as: MAB = 320 – Q.

c) What is the socially efficient (or optimal) amount of pollution abatement? (5)

 

d) At the socially optimal level of pollution abatement, what would be the socially optimal tax rate? (5)

 

Using the marginal pollution abatement cost functions of the firms, find each firm’s total cost function.

 

The total unregulated pollution level among all firms is 313 tonnes, which is divided among each firm as shown in Table 1, Column 2.

 

Now suppose that the pollution control authority wants to introduce 163 quotas or permits under the following two scenarios:

 

i) Non-transferrable pollution quotas are allocated without charge in equal quantities among firms

ii) Non-transferrable pollution quotas are allocated without charge in quantities proportional to unregulated level of pollution

 

e) What are the pollution quotas, required abatements, and compliance costs under the two scenarios (i and ii)? (6)

 

f) Economically which scenario (i or ii) would be cheaper and by how much? (4)

 

Table 1. Unregulated pollution level by firm

 

Firm

Unregulated level of pollution (tonnes)

1

88

2

85

3

75

4

65

Total

313

 

Assume that the authority now makes the quotas or permits marketable, i.e. firms can engage in trading the pollution quotas (or permits) until they achieve the same marginal abatement cost.

 

g) What would be the optimal amount of abatement by each firm once beneficial permits have been traded among firms? (5)

 

h) What would be the total abatement costs for the industry and to each of the polluting firm at the optimal level of abatement compared to non-transferrable pollution quotas under i) and ii). (6)

 

i) What would be the total cost savings (or efficiency gains) under the optimal allocation of abatement responsibility in comparison to non-transferrable quotas under i) and ii). (6)

 

j) What would be the permit costs and total financial costs to the firms and the industry under the optimal allocation of abatement responsibility among firms. (4)