Homework 2

due Feb 22 Tuesday

K Foster, Economics of Environment, Eco B9526, CCNY

Spring 2011

 

 

You are encouraged to form study groups to work on these problems.  However each student must hand in a separate assignment: the group can work together to discuss the papers and comment on drafts, but each study group member must write it up herself/himself.  When emailing assignments, please include your name and the assignment number as part of the filename.

Please write the names of your study group members at the beginning of your homework to acknowledge their contributions.

  1. Consider a market that can be represented by a linear demand curve, QD = 40 – 2PD, (where QD is the quantity demanded and PD is the price that demanders pay) and a linear supply curve that QS = 0.5PS (where QS is the quantity supplied and PS is the price that suppliers get).
    1. Graph the two functions with P on the vertical axis.
    2. What is the equilibrium value in perfect competition if the good has no externalities in consumption nor production.
    3. Suppose production of the good involved marginal external costs that raise costs by 2.  What is the deadweight loss of the private market?  What are PS and CS?
    4. What tax rate could eliminate the deadweight loss?  What would be PS and CS?
    5. Suppose the government imposed a tax of $3 per unit.  What is now the DWL?  PS and CS?
  2. Consider the market for a product with an output that pollutes the air.  The industry's Supply curve (only including private internal costs) can be represented as QS = 4PS.  The demand can be approximated as QD = 10 – 2PD.  The industry's marginal external costs from pollution occur as MEC = 0.1Q – 2 whenever Q, the quantity produced, is greater than 2.
    1. What is the privately chosen equilibrium quantity and price, when neither demanders nor suppliers take account of external costs?
    2. What is the MSC, the marginal social cost (the vertical sum of MC and MEC)?
    3. What is the social optimum level of production of this good?  What is the deadweight loss created by a lack of government action?
    4. Suppose the government introduced a tax (per unit of output) to try to move closer to optimum.  (Recall that this means that PD = PS + Tax.)  What tax would reduce DWL the most?
    5. If the government instead restricted the level of output through regulation, what regulation would be set?
    6. If demand for this product suddenly rose so QD = 12 – 2PD,  what would be the effects of the tax or regulation that was imposed above?  Is there DWL now?
  1. Write a short essay (about 200 words) on one of the topics discussed by Liam Heneghan that you found particularly interesting (which might reflect a bit of additional research on your part).  Each person should write their own essay although you should have someone in your study group proofread.