FIRST-ANS-w12-DE - ECONOMICS 238OC MID-TERM EXAM K Hu...

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ECONOMICS 238OC MID-TERM EXAM K. Huf February 1, 2012 TIME ALLOWED: 1 Hour CLOSED BOOK CALCULATORS PERMITTED 1. Each o± the ±ollowing statements is either true, ±alse or uncertain. State which [5 each] each is and brie²y, but precisely explain your answer. Your explanation is the most important part o± your answer. (a) For a particular pollutant being released at a particular place and time, the socially efficient level o± emissions is ±ound where the marginal dam- age ±unction and the marginal abatement cost ±unction are equated. True: Social efficiency means the tradeof between a marginal increase in pollution damages versus a marginal increase in pollution abatement costs are exactly ofset. This occurs at the point where the two costs are equated. (b) I± the MAC curve is ²at, that means that the marginal cost o± damages does not change with emissions. False: The MAC curve relates abatement costs (costs oF reducing emis- sions) to emissions or abatement. It is the MDC curve that relates marginal damage costs to emissions. (c) A market equilibrium can never be a social optimum because MSC ° = MSB. False: IF there are no externalities oF any kind, then a market equilibrium is a social optimum because MSC corresponds to the supply curve, and MSB corresponds to the demand curve, so the market equilibrium is a social optimum.
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FIRST-ANS-w12-DE - ECONOMICS 238OC MID-TERM EXAM K Hu...

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