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Resource Economics 262Problem Set #6, 15 pointsDue: April 1, 2021, 4 pm. Two versions of this assignment are posted, a Word version and a pdf version. You may either: (1) type your answers directly on the Word version, convert that to a pdf, and submit the pdf version, or (2) write your answers on a separate document, convert that to a pdf, and submit the pdf. You must submit a pdf copy. Do not simply cut and paste material from my lectures.Please include your name and your student ID number on your submission. Also, name the file you submit{your full name}RESECON262HW#6.pdf. Please make sure that you upload1and1submit your assignment when you are done. Warning for MAC users. Graphs in this assignment may not convert correctly if you download the MSWord version of this document with a program other than Microsoft Office. I believe you can install a free version of Microsoft Office through UMass IT. Alternatively you can1download the pdf version of the assignment, write your answers in a separate document, convert that to pdf and submit that document.1Note: The questions in this assignment come from Units 9 and 10. *****************************************************************************************1Consider our example from class of two firms using a lake, graphed below. One of the firms is an industrial plant that uses the lake to dump residuals while the other is a fishery. Use the graph below to answer questions (1) through (5) about liability rules and bargaining over the rights to use the lake (i.e., the property rights approach to resolving environmental conflicts). (1) What is the efficient level of emissions in the graph. [1 point] E3(2) In a sentence of two tell me what motivates the plant to reduce its emissions when faced with a strict liability rule. [1 point] When MD is greater than the MAC (MD > MAC) the plant will reduce emissions when faced with a strict liability rule. This is because the reduction in the plant’s payment tothe fishery from decreasing emissions a bit more is greater than the increase in its abatement costs.(3) What level of emissions will the industrial plant choose if it faces a strict liability rule? [1 point] E3(4) Name and explain two problems that limit the applicability of liability rules [2 points] Burden and standards of proof - In civil cases the burden of proof lies with the victim and finding/explaining the proof that contamination or pollution caused illness (or some type of problem) can be challenging. Transaction costs – the amount of money it takes to reach or enforce an agreement.(5) Now look at the problem in the graph from the property rights perspective. Use the Coase theorem to explain whether the two firms can bargain with each other to resolve the environmental conflict, and the result of any bargain they make. [3 points]Coase theorem: If agents are allowed to trade with each other they will trade to an efficient outcome ifproperty rights are well-defined, enforceable, and transferable and transaction costs are negligible. In this situation the maximum that the fisher is willing to pay is greater than the minimum that the plant is willing to accept. This means that a trade between them will take place. Since the MAC is greater than MD the plant is more willing to pay more for the right to pollute than the fisher requires inrecompense. This means that the trade between them will end up at the efficient level E3.2(6) With some exceptions, the National Ambient Air Quality Standards (NAAQS) for the criteria airpollutants are to be uniform across the nation. In the graph below are aggregate marginal abatement cost (MAC) and marginal damage (MD) functions for two regions of the country, 1 and 2. Use the graph to explain why a uniform ambient concentration standard for the country will be inefficient. [3 points] This will be inefficient because uniform standards cannot be efficient if different regions have different damage and abatement cost functions. Efficiency also requires two standards; one for region 1 where MD1 = MAC1 (A3), and one for region 2 where MD2 = MAC2 (A2). As we can see these two points on the graph do not overlap so the ambient concentration standard for the country will be inefficient.The graph below is of a single source of emissions with marginal abatement costs before and after adopting a cost-reducing technology. The source’s emissions will be controlled with emissions standards. Use this graph to answer question (7) through (9).3(7) Suppose at first that the firm faces an emissions standard E*, which does not change once it has adopted the new technology. Which area(s) indicate the firm’s cost savings from adopting the new technology. [1 point] D(8) Suppose that the regulator responds to the firm adopting the new technology by choosing the new efficient emissions standard. Which area(s) indicate the firm’s cost savings from the new technology when the regulator chooses the new efficient emissions standard after the firm adopts the new technology. [1 point] D + B + A(9) Compare your answers in (7) and (8) to explain why the firm’s incentive to adopt a new technologyis reduced if it expects the regulator to choose a new emissions standard in response. [2 points]The firm’s incentive to adopt a new technology is greater under an emission standard E** then an emission standard E*. This means that the new technology saves the most money at E** then at E* when implementing the new technology. If the firm is at E** (the most efficient emissions standard) the regulator choosing a new emissions standard would reduce incentive to adopt a new technology.

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UMass Amherst RES-ECON 262 - Problem Set #6

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