Economic Question

2. Chip and Dale run separate logging companies in the same forest. Both pollute the river flowing through the forest with debris from their work. In the table below, the first row shows the current level of debris that makes its way into the river from their work. The following rows show how much it would cost each logger to reduce its pollution by additional increments of 10 pounds. You are the official from the EPA who is responsible for the reduction of this pollution. Fully describe the cost-effective mechanism that you will design to reduce the current level of debris by half. (4 points)

3. Four companies, Alpha, Beta, Gamma and Delta, are burning coal to produce electricity. As a result, they also produce emissions. The first row of the table below shows the total pounds of emissions currently produced by each firm. The other rows of the table show the cost for each firm of reducing emissions by the first 50 tons, the second 50 tons, and so on. You are an EPA official and you want to design a cost-effective mechanism to reduce total emissions by one third. What will be the new levels of emissions of Alpha, Beta, Gamma and Delta under your mechanism ? (4 points)

4. Let qi and qp represent the total amounts of improper and proper disposal of soda cans. Thus if 25% of all waste is improperly disposed off, then by default, 75% is disposed of appropriately and safely. Let us say that total amount disposed is 100 units, i.e

qi + qp = 100

Assume that the total private and social benefits equation for improper disposal (qi) of soda cans is given by this equation:

The above equation is motivated by the avoidance of time and resources to collect wastes, and to bring non-recyclables to landfills and haul recyclables to a collection center. Because there are no external benefits, we assume that the total social benefits equal private benefits from improper disposal (3 points).

The marginal private and the social costs of illegal dumping are:

MPCi = 4 qi + deposit

MSCi = 7 qi

a. Show that when there is no deposit (set deposit = 0) private markets will dispose off a greater percentage of soda cans improperly; more than the socially optimal level.

b. Calculate the amount of deposit that we have to charge consumes at the front-end so as to achieve the socially optimal equilibrium.

5. The total private benefits (TPB) and total private costs (TPC) of refined petroleum are related to production levels (Q) as follows: (3 points)

TPB = 42 Q – 0.0625 Q2

TPC = 10 Q + 0.0375 Q2

We let total private benefits (TPB) also equal total social benefits (TSB).

However, production involves externalities and the marginal external costs (MEC) are:

MEC = 0.05 Q

a. What is the level of production if the market does not account for externalities ?

b. What is the socially optimal level of production ?

c. Suppose the government imposes an excise tax and achieves the socially optimal level of output. What is the dead-weight loss of this tax ?