L13 Tragedy of the Commons - Chapter 11 Externalities and Property Rights Problem set 3 due Feb 9-13 From the problems at the end of Chapter 10"Games

1 Problem set 3: due Feb 9-13 • From the problems at the end of Chapter 10 ("Games and Strategic Behavior"), pages 290-201: problems 1 and 2 • From the problems at the end of Chapter 11 ("Externalities and Property Rights"), pages 320-322: problems 3, 4, 8, and 9 Chapter 11: Externalities and Property Rights C. Dealing with externalities 1. Negotiation and the Coase Theorem 2. Taxes on activities with negative externalities 3. Subsidies for activities with positive externalities 4. Case study– ethanol for motor fuel • U.S. produces 40% of world’s corn • About 1/3 of U.S. corn production is devoted to ethanol production • current ethanol production is 500,000 barrels per day, which is 2.6% of total petroleum consumption Why used? • 51 cents tax credit for every gallon of ethanol blended with gasoline • reduced taxes on blended product itself in many states • tax credits and subsidies for biofuels infrastructure • subsidized water, fuel, and other inputs for farmers • use mandated by Energy Policy Act of 2005 • International Institute for Sustainable Development estimates total subsides amount to $1.05 to $1.38 per gallon • Implication: economic value of resources used up in producing ethanol is 50% greater than the value of the product to consumers • 1 Btu of energy inputs required to get 1.25 Btu of ethanol from corn U.S. ethanol program: (1) consumes 5% of world production of calories from corn, soybean, wheat and rice (2) raised the cost to world’s poor of meeting minimal dietary requirements by 34.5% Source: Roberts and Schlenker, “World Supply and Demand of Food Commodity Calories”, 2008.