practice_final_3

practice_final_3 - fFinal Exam Environmental Economics...

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June 11 th 2007 Environmental Economics Professor Matthew E. Kahn UCLA Spring 2007 Instructions: Please answer all questions. WRITE your name __________________________ Write your UCLA ID # _________________________ Write all of your answers on these exam sheets. There are no blue books. You have 3 hours to take this exam. Each question is worth 10 points. You should spend roughly 12 minutes on each question. The maximum score on this exam is 150. For the multiple choice questions, please provide your letter answer. You may also write a one sentence explanation for these questions. Good luck. Multiple Choice Section: Questions 1-9 2. Now suppose this steel factory is located in San Diego. San Diego has a population of 1 million people. In San Diego, each unit of pollution causes each person to be sick for 3 days. Each person is willing to pay $100 to avoid a sick day. The steel factory’s boss is thinking of increasing its steel production to meet foreign demand. An unintended consequence of this increased production would be 3 total units of pollution. There does exist a pollution prevention device that the steel factory can use such that the factory creates no pollution. In equilibrium: A. There will be no externality because the Coase Theorem guarantees that the efficient outcome will take place B. In absence of transaction costs, San Diego “victims” would pay $300 in aggregate to the firm to not increase production. C. If the steel factory has the property right to pollute, then if transaction costs are low the people of San Diego will pool their money and purchase a pollution cleaning device if its price is more than $1 billion. D. If the steel factory has the property right to pollute, then if transaction costs are low the people of San Diego will pool their money and purchase a pollution cleaning device if its price is less than $900 million. E. None of the above 3. Smoking is legal in St. Louis. The aggregate smoke created by St. Louis smokers floats downwind and lands in Chicago. In Chicago, the total population equals 500 people. Each person in Chicago is willing to pay $2 to avoid one unit of smoke from cigars. Assume that one cigar creates one unit of smoke. Aggregate demand for cigars in St. Louis equals Q = 300 – 2*P. In this equation, Q is quantity of cigars and P equals price (in $) per cigar. The
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practice_final_3 - fFinal Exam Environmental Economics...

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