ECON 371 Problem Set 1

Due: February 7th at midnight on Canvas

True or False

1. The value of reducing emissions is not $0, because it generates social benefits, nor
is it infinite, because it would imply 0 emissions is optimal.
2. A normative question is: How much would people pay to reduce air pollution?
3. For cumulative pollutants, only current emissions matter for damages.
4. Tradable permit systems are market-based regulations.
5. The demand curve is a way to represent the MWTP, but it is not useful to
calculate the Total WTP.
6. The marginal cost of abatement generally increases in the quantity of abatement.
7. The economic definition of efficiency is maximizing benefits minus costs.
8. If policy A is a Pareto improvement on policy B, then policy A also must be a
Kaldor-Hicks improvement on policy B.
9. If allocation A is a Kaldor-Hicks improvement over allocation B, then allocation A is
also a Pareto improvement over allocation B.
10. To find the social efficient outcome, we need to maximize the net value that
includes the total WTP and the social cost of producing that good.
11. When positive externalities exist, the external benefits include those realized by
someone outside the transaction and those the party paying for the good/service
gets.
12. An example of a free rider is a person who, from his window, can watch the Honda
Celebration of light fireworks.
13. To create the aggregate demand for public goods, we must sum vertically, holding
quantity constant, and add up the total WTP.
14. Nowadays, all open-access resources will face the tragedy of commons.
15. A cost-effectiveness analysis (CEA) does not convert the consequences of various
actions into money.
Multiple Choice

1. The policy challenge for episodic emissions is to manage ____________.

a. the probability of accidental discharges
b. the likelihood that continuous discharges are damaging.
c. people who frequently cause accidents
d. air pollution in developing nations
e. All above
f. None Above
2. In a model with only abatement and damage costs (like the one we have discussed
in class), the optimal level of pollution ________ .
a. equates total abatement costs and total damage costs.
b. minimizes the sum of abatement costs and damage costs.
c. cannot be achieved without some form of government intervention.
d. is zero.
e. All above
f. None Above
3. An unregulated market produces an efficient level of production if _______.
a. All goods are traded in competitive markets, there is private information, all
individuals maximize their utility, and there are no externalities or public
goods.
b. All goods are traded in competitive markets, there are publicly known
prices, all individuals maximize their utility, and there are public goods.
c. All goods are traded in competitive markets, there are publicly known
prices, all individuals maximize their utility, and there are no externalities or
public goods.
d. All goods are traded in competitive markets, there are publicly known
prices, some individuals maximize their utility, and there are no externalities
or public goods.
4. A form of market failure is:
a. Monopoly
b. Monopsony
c. Sellers know more than buyers.
d. External costs
e. All above
f. None of the Above
5. Which of the following generally create deadweight loss, assuming no other
market failures?
a. There exists a negative externality.
b. There exists a positive externality.
c. There is a pecuniary externality.
d. There are external benefits.
e. All above
f. A and B
g. B and C
h. A, B and D
6. Consider a flower stand near an office building. The workers in the office building
can buy the flowers and place them at their desks. The workers derive private
benefits from the flowers, but all other workers in the office benefit from flowers
in the building, even if they themselves did not purchase the flowers.

The flowers are providing a _____ externality, and that externality is created by the
_______ of the flowers.

a. Negative, consumption
b. Negative, production
c. Positive, consumption
d. Positive, production
Short Questions
1. Elizabeth and Justin’s indifference curves are given in the following Edgeworth
box diagram.

Draw the following:

A. A point that is clearly not Pareto efficient, label it Y.
B. A point that is Pareto improvement on your point Y, label it X.
C. The contract curve.

2. You are the mayor of a small town, and an oil company is offering you $250,000 to
locate a new refinery in your town.
A credible non-profit report this refinery will cost your town $60,000 in health costs
each year for the next 10 years that it operates. It also reports that the refinery will
bring a temporary boost in jobs as it comes online that will amount to $30,000 per year
for the next 5 years. Your discount rate is 6%.
Write down and upload a picture of an equation that calculates the Net Present Value
(NPV) of this choice. Assume that the health costs and labor benefits accrue at the end
of each year, i.e., they first occur at the end of the first year. (This equation should use
summation formulas.)
3. Consider a consumer whose WTP for air purification can be represented as
MWTP = 40 - 5Q, where Q is the amount of air purification demanded.
What is this person's total WTP for 5 units of air purification?
The proposed tax on canola farms in Alberta can be justi ed on economic grounds as a Pigouvian tax, which is
designed to correct a negative externality—in this case, the environmental damage caused by pesticide use.
When farms use neonicotinoids, they impose external costs on society, such as soil degradation, harm to wild
animals, and ecosystem disruptions. However, these costs are not re ected in the market price of canola,
leading to overproduction relative to the socially optimal level. By imposing a tax, the government internalizes
these external costs, aligning private incentives with the broader social interest.

Additionally, from a market failure perspective, the canola market is currently operating in a way that does not
account for environmental damages, leading to inef cient resource allocation. Without intervention, farms will
continue overusing pesticides, exacerbating long-term ecological harm. A tax would incentivize farmers to
adopt more sustainable practices, such as using alternative pest control methods or reducing chemical
applications. This intervention moves the market toward a socially ef cient equilibrium, where the marginal
social cost (MSC) of production equals the marginal social bene t (MSB).

However, the government must carefully design the tax to balance ef ciency and equity. If the tax is too high,
it could burden farmers, reduce employment, and disrupt Alberta’s major agricultural industry. A portion of the
tax revenue could be reinvested into sustainable farming initiatives or compensation programs to support
affected workers. Ultimately, while taxation is an effective tool to correct negative externalities, it should be
implemented alongside incentives for eco-friendly alternatives to ensure both economic and environmental
sustainability.
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