Reference no: EM13759272

1) Kolstad Page 129, Problem 1

A dam is proposed on a stretch of wild river, a river that is currently used for recreation.  The dam will generate electricity.  The dam will have a useful life of 50 years, after which the reservoir will be full of sediment and the dam will need to be removed.  The following are the characteristics of the dam:

Initial cost:  $100,000,000
Electricity purchased: 100,000 Mwh per year, @ $100/Mwh.
Cost of decommissioning dam: $10,000,000
Value of recreation lost:  $5,000,000 per year.

a.  If the social discount rate is 3% per year, is the dam a good idea?
b.  If the social discount rate is 10% per year, is the dam a good idea?
c. Calculate the "cutoff" discount rate, c, such that the dam is a good idea for discount rates <c and a bad idea for discount rates >c. 

2) Kolstad

Explain how the public interest theory of regulation might come to a different conclusion regarding emission fees v. marketable permits than the interest group theory

3) Kolstad Page 260, 5

The Rocky Mashed Potato factory produces output at costs C=Q² (marginal cists 2Q), where Q is the quantity of mashed potatoes produced, in tons.  In addition, 2 units of emissions are produced for each ton of mashed potatoes (E=2Q).  Polluting damage is $2 for each unit of emissions, which leads the government to charge $2 per unit of emissions as a Pigouvian fee.  The firm's output selsl competitively for $10 per ton.

a.  How many tons of mashed potatoes will the Rock Mashed Potato Factory produce? How much does it pay in emission fees? What are its profits?

b.  A devise is invented that would reduce the firm's emissions to one unit for each ton of output (E=Q).  How much is the firm willing to pay for such a devise?

c. How would your answer to part B change if there were no government regulation of pollution?  What does this lead you to say about the relationship between government and the market for abatement equipment?

4) Kolstad Page

In the 1970s in U.S. cities, air emissions were governed almost completely by prescriptive regulations.  One of the problems faced by regulations in large urban areas with air quality well below desirable levels was how to let new polluters into the city without reducing air pollution.  Regulators came up with an innovative approach called the offset system.  New sources had to "convince" exiting sources of emission to reduce emissions.  The overall effect of all of the reductions had to at least offset the pollution additions by the new sources.  Explain why or why not this so-called "offset system" is equivalent to a marketable permit system.

5) Kolstad Page

Two identical firms save money from polluting.  A firm's marginal saving from emitting an amount e are given by 10-2e.  The two firms differ in their impact on ambient pollution concentrations.  Two units of emission from firm 1 result in one unit of ambient pollution.  Firm 2 has twice the impact on the ambient environment from the same amount of emissions.

a. What are the transfer coefficients for each of the two firms?

b. If firm 1 is given two emission permits and firm 2 is given four emission permits and they are allowed to trade, how many permits will each firm end up with and what will be the price?

c. If instead each firm is given two ambient pollution permits and trading takes place, how much will each form end up emitting and what will, be the permit price?