Economic Analysis of Taxation and Externalities, Assignments of Environmental Science

Download Economic Analysis of Taxation and Externalities and more Assignments Environmental Science in PDF only on Docsity! ESM 251 Problem Set 2 TA: Grant Answers 1 Point values are in brackets; 100 points total 1. [26] a. P* = $2.125 , Q*= 162.5 ~ 162 or 163 pairs of boots (rounding varied by person, so values below use 162.5) b. AreaTriangle = ½ B*H CS = ½ * ($2.66 – $2.13)*162.5 = $44.01 PS = ½ * ($2.13 – $0.50)*162.5 = $132.03 Total welfare = CS + PS = $176.04 c. TAX = $0.50 per unit Q P 0 S D $0.50 162.5 Slope = -1/300 very elastic $2.66 Slope = 1/100 elastic $2.13 CStax PStax 125 DWL $1.75 $2.25 Q P 0 S D $0.50 162.5 Slope = -1/300 very elastic $2.66 Slope = 1/100 elastic $2.13 CS PS ESM 251 Problem Set 2 TA: Grant Answers 2 Solve for quantity under tax: (shown three ways) i. Add $0.50 to supply: P = 1 + Q/100 Equate with original demand: P = 8/3 – Q/300 ii. Subtract $0.50 from demand: P = 13/6 – Q/300 Equate with original supply: P = ½ + Q/100 iii. Subtract supply from demand and equate to 0.50: Equate with original demand: 0.5 = 8/3 – Q/300 – ½ – Q/100 Qtax = 125 Now substitute this into original supply and demand P supplier = $1.75/pair P consumer = $2.25/pair Difference between them? Tax wedge = $0.50/pair d. Tax Revenue = $tax*Quantity sold = $0.50*125 = $62.50 Consumer incidence = $2.25 - $2.13 = $0.12/unit or $0.12*125 = $15, 24% of the tax revenue Supplier incidence = $2.13 - $1.75 = $0.38/unit or $0.38*125 = $47.50, 76% of the tax revenue So, of the $0.50 tax, consumers (who are relatively more elastic than producers, in this case) bear less of the burden. e. CS = ½*($2.66 – $2.25)*125 = $26.04 PS = ½*($1.75 – $0.50)*125 = $78.13 Social welfare = CS + PS + TaxRev = $166.67 f. Dead Weight Loss = DWL = $9.38 i. DWL = Social Welfareorig – Social Welfaretax ii. Area of DWL Triangle = ½*0.50(162.5 – 125) ESM 251 Problem Set 2 TA: Grant Answers 5 4. [12] a. If is grosses someone out, then “chewing with his or her mouth open” it is a negative externality, but the responsibility to mitigate depends on who has the ‘property right.’ b. Education at Bren is a positive externality on both the consumption and production sides: while you are in school you are benefitting the knowledge base, your group project will be a contribution to environmental problem-solving, and then (hopefully) you will go out pursue a job that also benefits society (you will be paid, but many will benefit even if they are not the ones paying). c. When someone comes unprepared to a study group, it tends to produce a negative externality for the remaining members who either have to explain to the unprepared student or do extra project work. d. This is an unfortunate case of free market with limited supply – if someone has a willingness to pay for the ticket and the scalper is willing to sell it, then no externality has been generated; all parties are compensated and those who did not attend the game just weren’t willing to shell out enough for it. Scalping is often illegal not because of externalities but because the facility cannot monopolize on the rents and government cannot tax the exchange. e. Positive externality: everyone benefits if the question is a good one and the professor provides some insight (and you are not dazing off in class!). f. Negative externality: congestion on other drivers, GHG’s into atmosphere, even if it is more convenient for you and the people you are driving to see. 5. [10] We found that for goods associated with a negative externality, the efficient quantity of exchange is lower than that which is determined by the market AND this result holds regardless of whether the externality is consumption-based or production- based. Demonstrate graphically that the opposite holds with a positive externality. For the left graph, a consumption positive externality (immunizations), we’d like the demand to be higher at every quantity so that more is produced. On the right for a supply- side positive externality (gardens), we want to reduce the cost at every quantity, again, to incentivize production. A subsidy could instigate the social optimum in either case. Q P MB MC SMB Q P MB MC SMC ESM 251 Problem Set 2 TA: Grant Answers 6 6. [18] a. See graph b. Q* = 13 million/day, Qeff = 11 million/day c. DWL = ½ * 2 * 2mil = $2 million/day d. Tax: $2 per gallon e. $2*11million = $22 million/day f. TS = CS + Tax Rev = ½ *($15 – $4)* 11million + $22 million = $82.5 million/day g. There is still $22 million in pollution costs and this is the efficient amount to have. Tax revenue could be spent to further mitigate the pollution but could also be used to offset other markets where there is an inefficiency (reduce taxes on non-externality markets or subsidize public goods). 7. [10] Address “Free-market environmentalists” = limited government intervention and “Government administered environmental policies do more harm than good.” Merits: The main rationale given by free-market environmentalists is that people take better care of private property when they have the freedom and authorization to do so, encouraging personal stewardship of resources. The premise is that government should be small and exist only to assign property rights and enforce them, not for instituting policies such as pollution taxes, quotas and public goods provision. And, they tout that by legislating environmental policies, individuals are discouraged from acting in their own best interest. Environmental problems which do occur could be addressed at the appropriate level: first at the private level, then the local level, then the state level, and only as a last resort at the federal level. Polluters should be held responsible for resource damage and liable for the harm they cause to others, not to the government. Instead, taxes pass the burden onto government (bureaucracy and budget allocation) and the buck onto all consumers, regardless of desire or need. Qmillions P 0 S=pMC D $2 15 $15 $4 CS SMC 1311 DWL tax = $2Tax Rev = pollution costs ESM 251 Problem Set 2 TA: Grant Answers 7 Government control and subsidies may even degrade the environment by not allowing natural progression and efficient allocation of resources. The market tends to be more flexible and responsive for profit/utility maximization in contrast to regulation. Market incentives can spur individuals to improve environmental quality (examples are self- imposed fishing quotas, private park fees, and water markets). Information about costs and benefits are more readily available for the individuals affected. If parties are not forthcoming with information and negotiation, lawsuits can settle the conflicts that remain. Perhaps, each person will be motivated by personal interest and the thought of suit may incentivize negotiation. Coasian bargaining could become more of the norm. Limitations: Yet, privatization will not solve the pressing environmental issues of wide-spread externalities. First, the ability of Coasian negotiation breaks down when either property rights cannot be defined or transaction costs are high. There are examples without a clear sense of boundary and jurisdiction: air quality, oceans, and climate change. These cases affect numerous individuals and entities, but in incremental amounts – the ability to coordinate and fairly distribute settlements is intractable. The ‘tragedy of the commons’ can occur because everyone will want the benefits of use but not the cost to abate the pollution/use. Instead, government can pursue collective action on behalf of the democratic public. Secondly, even with privatization, distribution of property rights and endowments (who has the money and power) can be very lop-sided and leave many without access or even means to earn access. Natural monopolies occur with ownership of many resources; therefore the government limits the ability of these arrangements. And finally, the temporal nature of agreements must be recognized. Many firms and even individuals are short-sighted optimizers. Government regulation and taxes attempt to prescribe for intergeneration success in the midst of potentially long-lived pollution and degradation.