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PS5 - Econ 131 Problem Set 5 1 Chapter 2 of the textbook...

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Unformatted text preview: Econ 131 Problem Set 5 1. Chapter 2 of the textbook states that market failure in sustainable goods markets results from adverse selection (p. 25). Explain how government policy can address this issue and promote sustainable production. 2. The demand for printing paper on the Island of Trevia is represented by MB(Q)=5-0.5Q. The supply of paper from new raw materials is MC(Q)=0.5Q. a. What would the market allocation be? Under what conditions would it represent the social optimum? b. After many years of paper produced and ending in the landfill, the government realized that reusing the paper might be a good idea. One of the Trevian scientists found a way to recycle paper. The MC curve using this technology is MC(QR)=5+0.5QR. Assuming that only the government cares about sustainability and the consumers are indifferent between recycled and non-recycled paper, are the firms likely to adopt the new technology? And if not, how could the government promote sustainable production of paper? c. Now assume that there is a sub-group of consumers that cares about sustainability with MB(QR)=10-0.5QR. How would your answer to (b) change? 3. Debt-for-nature swaps represent a mechanism to incentivize protection of nature in developing countries. What are likely difficulties in applying such a policy? Can you think of optimality criteria that you learnt in this class that can inform policy in this context? 4. A large rainforest spans two bordering countries (country A and country B). Both countries have the option of cutting down a portion of the forest within their respective borders in order to use the land. Country A is a developed country that has a low marginal benefit of additional deforestation. The marginal benefit (in thousands of dollars) to country A for each 1000 acres of forest cut down within its borders is given by , where x is in thousands of acres deforested in the country. Country B is a lesser developed country which depends heavily on the timber and land made available through deforestation. The marginal benefit, in millions of dollars, to country B for each thousand acres of forest removed within their borders is given by . Assume the private marginal cost of clearing the forest in both countries is equal to $20,000/thousand acres of forest cleared. a. In the absence of any regulations on deforestation, what will be the equilibrium quantity of forest cleared in each country? A study is done to estimate the true social cost of deforestation. The study finds that the citizens of Country A place a large value on forest preservation. The study finds that the citizens of Country A are willing to pay to preserve an additional 1000 acres of forest land (in either country). Assume that the WTP to avoid deforestation in Country B is found to be equal to zero. b. If Country B continues to remain at their competitive equilibrium level of deforestation, what level of deforestation in Country A will maximize the welfare of the citizens of Country A? c. Suppose Country A outlaws cutting down the forest within their borders. What is the total surplus for Country A under this policy? How much does the policy increase (or decrease) total surplus for Country A (compared to the total surplus that would be obtained by remaining at the competitive equilibrium level of deforestation)? Suppose in addition to the above regulation, Country A offers the following subsidy to Country B. Country A will pay Country B a subsidy of "s" thousand dollars for every thousand acres of deforestation reduced in Country B. d. What level should Country A set the subsidy in order to maximize the total surplus for Country A? e. What will the total surplus be for Country A at this new optimal level of deforestation? (Hint: you need to consider the subsidy payment being transferred to Country B.) 5. In the previous question, a developed country subsidizes forest preservation in a lesser developed country. Is this result consistent with the Kuznets Curve presented in chapter 6 of the text? Explain. ...
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