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5 Questions Answers on Economic Environment Management - Midterm Exam | ESM 204, Exams of Environmental Science

Material Type: Exam; Class: ECON ENV MNGMNT; Subject: Environmental Science & Management; University: University of California - Santa Barbara; Term: Winter 2007;

Typology: Exams

Pre 2010

Uploaded on 09/17/2009

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ESM 204 Midterm
Instructions
You may not discuss anything about this exam with any person except
Professor Costello or Mr. Conte until after it is due (2/22/07 at 11:00 in hard
copy).
Answer any 5 out of 6
Be clear about your assumptions
Be concise
Each question is worth 20 points, for a total of 100 points. Subparts are
allocated accordingly.
1. A local industry consists of 5 firms who each produce pollution. Each firm uses a
different production technology and therefore faces a different abatement cost
function. This question concerns the economically efficient amount of abatement
by each firm. The marginal abatement cost function for firm i is MCi(Xi) = ai +
biXi, where ai and bi are firm-specific parameters and Xi is the amount of
abatement that firm undertakes. The parameter values are given as follows:
Firm (i)ai bi
1 2 1
2 0 3
3 6 0
4 3 2
5 5 0.5
a. Draw the marginal abatement cost function for each firm. Explain to a
non-economist what this curve represents, e.g. for Firm 1.
b. If the target level of abatement is .00001 unit, who should undertake the
abatement? Why?
c. If the target level of abatement is 50 units, who should undertake
abatement, and how much? 100 units? Why?
d. Draw the total abatement cost curve and the marginal abatement cost
curve for this industry.
2. This question concerns the current response to climate change. The facts of actual
climate change policy have been stylized to make this problem tractable. You are
a policy-maker charged with determining whether to control carbon emissions or
whether to continue with business as usual emissions. Controlling emissions
comes at a cost to the economy (relative to business as usual economic activity),
but owing to anticipated technological improvements, the annual cost declines
over time. For the first decade, the cost is $10B per year. For the second decade,
the cost is $8B per year. For the third decade, the cost is $6B per year, and so
forth, until there is no cost at all. The benefit of controlling is the avoided future
damage from climate change. The damages from business as usual emissions
(relative to controlling) occur far into the future. The damages are $100B per
year every year forever, starting in 100 years.
a. Based on basic cost benefit analysis, should we control or not? On what
assumptions does your analysis hinge?
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ESM 204 Midterm Instructions  You may not discuss anything about this exam with any person except Professor Costello or Mr. Conte until after it is due (2/22/07 at 11:00 in hard copy).  Answer any 5 out of 6  Be clear about your assumptions  Be concise  Each question is worth 20 points, for a total of 100 points. Subparts are allocated accordingly.

  1. A local industry consists of 5 firms who each produce pollution. Each firm uses a different production technology and therefore faces a different abatement cost function. This question concerns the economically efficient amount of abatement by each firm. The marginal abatement cost function for firm i is MCi(Xi) = ai + biXi, where ai and bi are firm-specific parameters and Xi is the amount of abatement that firm undertakes. The parameter values are given as follows: Firm ( i ) ai bi 1 2 1 2 0 3 3 6 0 4 3 2 5 5 0. a. Draw the marginal abatement cost function for each firm. Explain to a non-economist what this curve represents, e.g. for Firm 1. b. If the target level of abatement is .00001 unit, who should undertake the abatement? Why? c. If the target level of abatement is 50 units, who should undertake abatement, and how much? 100 units? Why? d. Draw the total abatement cost curve and the marginal abatement cost curve for this industry.
  2. This question concerns the current response to climate change. The facts of actual climate change policy have been stylized to make this problem tractable. You are a policy-maker charged with determining whether to control carbon emissions or whether to continue with business as usual emissions. Controlling emissions comes at a cost to the economy (relative to business as usual economic activity), but owing to anticipated technological improvements, the annual cost declines over time. For the first decade, the cost is $10B per year. For the second decade, the cost is $8B per year. For the third decade, the cost is $6B per year, and so forth, until there is no cost at all. The benefit of controlling is the avoided future damage from climate change. The damages from business as usual emissions (relative to controlling) occur far into the future. The damages are $100B per year every year forever, starting in 100 years. a. Based on basic cost benefit analysis, should we control or not? On what assumptions does your analysis hinge?

b. Suppose we were uncertain about both (1) the rate of technological progress (which affects the costs over time) and (2) the damages from business as usual. Show how to incorporate these into your analysis and determine how sensitive your results are to assumptions about these sources of uncertainty.

  1. A local for-profit company, CO 2 nscience (pronounced CO 2 conscience), plans to offer members of the UCSB community the opportunity to purchase Carbon credits to offset the CO2 emissions that result from their daily energy-use and transportation activities. CO 2 nscience will pay local companies to commensurately reduce their carbon emissions. CO 2 nscience has hired you as an advisor to identify the profit-maximizing price at which to offer the credits to the UCSB community. a. Briefly describe a step-by-step method for calculating the UCSB community’s demand for carbon credits from CO 2 nscience. b. Once you have a demand curve, how would you calculate the price CO 2 nscience should charge to maximize their profits? You may find graphical analysis to be useful.
  2. Much of the coastal land on the Gaviota Coast is currently employed for agricultural purposes. Farmers of these properties need to purchase fertilizer (Nitrogen) for viable crop production. However, due to their proximity to the ocean, runoff from these fields results in bacterial blooms that represent a cost to society due to the health afflictions they impose on surfers and other beachgoers. The Nitrogen demand from the local agricultural industry is given by P(Q)=1000- 20Q, where Q, the quantity of Nitrogen used, is measured in tons. The farmers’ cost (purchase cost plus application cost) is $300/ton (i.e., the private cost curve is given by C(Q)=300Q). As mentioned above, the Nitrogen used by these farmers imposes a cost on society due to the increased number of bacterial infections associated with oceanic blooms caused by runoff. The first 10 tons impose no damage. Tons 11-20 are associated with a societal cost of $50 per ton, while each additional ton applied above 20 tons, carries a social cost of $200 per ton. a. If left unregulated, how much Nitrogen will be applied? b. Illustrate graphically the private and social costs of Nitrogen application on the Gaviota coast. c. What is the socially-optimal amount of Nitrogen to be applied? Explain. d. Describe one regulatory mechanism to achieve the socially-optimal outcome. Defend your choice.
  3. A new air quality regulation is being considered in the Los Angeles Basin which will have significant positive health effects. If adopted, the regulation will take place for 1 year. Over an affected population of 1 million people, this new regulation is expected to reduce everyone’s risk of developing lung cancer by 0.1% during that year (you can assume this is the only health effect). Your job is to calculate the economic benefit of this reduction in lung cancer risk. To do so, you are provided with the following data on annual salary (in thousands of dollars), lung cancer risk, and years of experience for a sample of jobs and employees in the LA basin. The data are available here: