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.
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2
•
86% of Americans support (reason:
reduce dependence on foreign oil)
•

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- Spring '09
- HAMILTON
- Externalities, Externality, weight/ Total pounds
-
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