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ENVIRONMENTAL AND RESOURCE ECONOMICS MIDTERM EXAM

Q1. 

Suppose the market demand function (expressed in dollars) for a normal product is P= 80 - q, and the marginal cost (in dollars) of producing it is MC = 1q, where P is the price of the product and q is the quantity demanded and/or supplied.

a.  How much would be supplied by a competitive market? Graph the demand and supply curves, and the equilibrium price and quantity. Label all the points. [5 points]

b.  Compute the consumer surplus; producer surplus and the economic surplus. [5 points]

c. Compute the consumer surplus assuming this same product was supplied by a monopoly. (The marginal revenue in this case is MR = 80-2q). Graphically represent the consumer surplus for the monopoly. [5 points] (15 Points) 

Q2. 

There is a factory that is dumping toxic waste into a river where a resort is located downstream. At the moment, the factory is not filtering the water that it dumps into the river. There is a filter it could install that would remove a significant amount of the toxic elements from the water before it is dumped in the river. The factory and the resort have each assessed the situation and come up with the following data:

a. If the factory is given ownership of the river, what choice will it make? How much would the resort be willing to pay to get the factory to make another choice? Will the factory accept? [5 points]

b. How much would the resort be willing to pay to get the factory to make another choice? Will the factory accept? [5 points]

(10 Points)

Q3. 

Assume that the demand curve for an environmental good is fully coincidental with the marginal social benefit function and can be described as MSB = MPB = 12-3q, where q refers to the quantity of the good. Assume that the marginal private cost function can be described by MPC = q, and that marginal social costs are always triple the marginal private cost.

A. Determine an equation for the marginal social costs (MSC).

B. Graph the functions and algebraically determine

i. the market level of output

ii. ii. the optimal level of output 

C. Calculate social welfare at the market level of output and at the optimal level of output. What is the deadweight loss from these social costs?

(10 Points)