Environmental Decisionmaking

Problem Set 4

1: (6 pts). Use a fairly large graph for this problem, so that you have room to do some analysis. Draw a hypotheical supply and demand curve for the market in MEKY (methyl-ethyl-killyou). Mark on your graph the amount of MEKY that will be produced at equilibrium in this market. Now, assume that the production of MEKY involves the emissions of toxic gasses into the high atmosphere, and that the companies involved are able to emit these gasses without penalty. Draw the "total cost" curve (i.e. production costs plus social costs) on your graph. If the government wanted to add a cap on the production of MEKY, what would be the amount of MEKY that should be produced? Show that value on your graph. Finally, assume that the government isn't quite sure exactly what the social cost function is (though you can see it on your graph), and so they have to estimate the level where they should cap emissions. Can you indicate on your graph at roughly what level the cap would be so onerous as to be worse than not doing anything?

2: (4 pts) Some people argue that the reason we have problems with externalities is that ownership rights are not fully defined in many cases. In fact, they suggest that we could solve any environmental problem caused by externalities simply by assigning ownership rights for all goods (including things like air, water, and so on). Ignoring for the minute the fact that this might be technically impossible, and forgetting that the owners will be greedy bastards who will focus on short term gains, explain the idea behind this argument.

3: (4 pts) Under what types of conditions might it be economically "rational" to use up a renewable resource, even if it means you will never get to use that resource again.

4: (4 pts) Is society the sum of individual wants as economists assume? In other words, can we determine net social good by summing up everyone's value for individual subjective well-being (or consumer surplus)? Discuss in an interesting way (for example, if it isn't, then what else is there?).

5: (2 pts) Why do economists think it's OK to ignore distribution when looking at social welfare?