micro econ questions

1. For question (1), answer both of the options below:  

    1a) Does it make sense to attempt to eliminate all pollution or is there an “optimal” amount of  pollution?  Explain.    

    1b) Suppose a city releases 16 million gallons of raw sewage into a nearby lake. The table below shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits include environmental, recreational, health, and industrial benefits.)  

 

	Total Cost (thousands of dollars)	Total Benefits (thousands of dollars)
16 million gallons	Current situation	Current situation
12 million gallons	50	800
8 million	150	1300
4 million gallons	500	1850
0 gallons	1200	2000

 

Using the information in the table, calculate the marginal costs and marginal benefits of reducing sewage emissions for this city. {See Cost and Industry Structure if you need a refresher on how to calculate marginal costs.}  

           *What is the optimal level of sewage for this city?  

           *Why not just pass a law that zero sewage can be emitted? After all, the total benefits of zero emissions exceed the total costs.  

2a.) Define externality, and briefly discuss examples of a positive and negative externality. 

2b.) Briefly compare command-and control environmental regulation to a pollution charge.  Does a pollution charge have any advantages over command-and-control?  Elucidate. 

3. HighFlyer Airlines wants to build new airplanes with greatly increased cabin space. This will allow HighFlyer Airlines to give passengers more comfort and sell more tickets at a higher price. However, redesigning the cabin means rethinking many other elements of the airplane as well, like the placement of engines and luggage, and the most efficient shape of the plane for moving through the air.  

   HighFlyer Airlines has developed a list of possible methods to increase cabin space, along with estimates  of how these approaches would affect costs of operating the plane and sales of airline tickets. Based on these estimates, the following table shows the value of R&D projects that provide at least a certain private rate of return.  

 

Private Rate of Return  (%)	Value of R&D  (millions of $)
12	100
10	200
8	300
6	400
4	500

 

Column 1 = Private Rate of Return.  

Column 2 = Value of R&D Projects that Return at Least the Private Rate of Return to HighFlyer Airlines.  

*If the opportunity cost of financial capital for HighFlyer Airlines is 6%, how much should the firm invest in R&D?  

*Assume that the social rate of return for R&D is an additional 2% on top of the private return; that is, an R&D investment that had a 7% private return to HighFlyer Airlines would have a 9% social return.  How much investment is socially optimal at the 6% interest rate?