PS1 - EEP 101/Econ 125 Spring 2010 GSIs: Biswo, Diana...

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Unformatted text preview: EEP 101/Econ 125 Spring 2010 GSIs: Biswo, Diana Problem Set 1 Due on Tuesday, February 1 at lecture. Late assignments will not be accepted. 6th Numerical Questions 1. (40 Points) Suppose the industry for rambutans (a fruit) has a demand curve given by Q = 60 — %P, where P is the price in dollars, and Q is the quantity. The marginal private cost (MPC) of production is MPC = 20 + Q, and the marginal external cost of production (MEC) is given by MEC = 2Q. (a) (b) Determine the socially optimal level of output Calculate the total external cost (TEC*), consumer surplus (CS*), producer surplus (PS*), and total social welfare (SW*) at this level of output. Calculate the quantity produced if the market is in perfect competition and only private costs are accounted for (the externality associated with production is NOT taken into account). What is the quantity produced (QC)? Calculate the total external cost (TECC), consumer surplus (CSC), producer surplus (PSC), total social welfare (SW6) and dead—weight loss (DWLC) at this level of output. Now assume that this industry is operate by a middleman who buys up all the rambutans from local farmers and packages them, and she is the only source of rambutans to consumers. What is the quantity produced (Qmm)? Calculate the total external cost (TECm), consumer surplus (05m), producer surplus (PSm), total social welfare (SWm) and dead—weight loss (DWLm) under a monopoly. Now suppose that the government wants to fix the externality problem using a price mechanism (tax or subsidy). Calculate the optimal tax or subsidy under a competitive market (part b) and under a middleman (part c). Graphically, show how this tax or subsidy (choose one) is chosen under both cases. Assume that the market is perfectly competitive, and the government imposes the appropriate tax or subsidy (calculated in part d). Be sure that you clearly indicate which one you are using! Compared to (part b), how do the government’s finances change? What is the change in consumer surplus, producer surplus, total external costs, and social welfare? What is the level of dead—weight loss? 2. (30 Points) Suppose the Oakland School of Art and Music (OSAM) is run with private funds and it has net costs of schooling, MPC=100+4Q since schooling is costly and the monetary returns are low. (Q represents a unit of schooling.) On the other hand, many people argue that art and music enrich the public culture and therefore provide an external benefit associated with schooling given by MEB=400—Q. 1 (a) What is the optimal amount of schooling provided by OSAM? What is the optimal amount of schooling from the public point of View (those experiencing the external benefits)? What is the optimal amount of schooling from the societal point of View? Explain your answers. (b) What is the dead—weight loss under the OSAM’s optimal choice? What is the dead—weight loss under the public’s optimal choice? (c) Suppose some people were interested in running a second school of art and music with the same net costs as OSAM. Calculate the new optimum from the societal point of view. Compare the total welfare under one school with that under two schools. ((1) Return to the case of one school. Calculate the total amount of revenue that would have to be raised for OSAM under the social optimal case for the school to break—even. Essay Question Write a brief typed essay (less than one page) on the topic described below. Be sure to write your answer in the form of an essay; don’t just answer the questions listed below. Please relate your essay to what we have discussed in class and try to hit on what you believe are the few relevant key points. (30 Points) Under the international agreement laid out by the Kyoto Protocol, the participant countries committed to reach binding targets for green house gas emissions. They also laid out three market based mechanisms to promote the achievement of these targets: emissions trading, clean development mechanism, and joint implementation. The emissions trading mechanism created a market for carbon using the idea of tradable permits. The clean development mechanism allows industrialized countries to earn credits toward their targets by implementing emission—reduction projects in developing countries, while the joint implementation mechanism allows the countries to earn credits with emission—reduction projects in other paricipant countries. Discuss the benefits and drawbacks of the emissions trading mechanism and one of the two credit—earning mechanisms. Comment on the likely advocates of each policy, and compare the mechanism With a carbon tax and and an untransferrable carbon quota. (http: //unfccc.int/kyotopr0tocol/items/2830.php) ...
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This note was uploaded on 03/17/2011 for the course EEP 101 taught by Professor Ziberman during the Spring '11 term at University of California, Berkeley.

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PS1 - EEP 101/Econ 125 Spring 2010 GSIs: Biswo, Diana...

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