Externalities

1. Consider the market for bee hives in a rural area a. Why might bee hives exhibit positive externalities in a rural area (hint: think of bee's primary ecological role)? b. Draw a graph for the market for beehives, labeling the demand curve, the social value curve, and supply curve c. Indicate the market equilibrium quantity of beehives sold and the socially optimal quantity that should be sold. Give an intuitive explanation for why these differ d. Describe one command and control policy and one incentive-based policy that could help correct this externality 2. We generally seem to think that levels of many pollutants in society are too high a. If society wishes to reduce overall pollution by a certain amount, why is it efficient to have different amounts of reduction coming from different firms? b. Command-and-control policies often rely on uniform reductions in pollution across firms. Why might these approaches generally have a hard time targeting the firms that should be making the biggest reductions? c. How might incentive-based regulations such as a corrective tax or tradable permit system target firms that should undertake the biggest cost reductions? 3. Read the NY Times article titled "A Conservative Climate Solution': Republican Group Calls for Carbon Tax" from Feb 7th (available on Canvas under Files>Readings) and answer the following questions: a. Draw a graph of the regulated (i.e., taxed) market for fossil fuels, assuming that the damages are constant and roughly equal to the $40 tax per ton suggested in the article. Show the supply, demand, and social cost curves, and label both the optimal price P* and quantity q* as well as what the market price and quantity would have been in the absence of regulation. b. Given what we have already discussed about the science of climate change, do you think that it is reasonable to assume that damages are constant as CO2 increases? Why or why not? c. Which of the standard for decision making (efficiency, safety, sustainability) do the politicians in this article seem to be relying on the most? Make explicit reference to THREE pieces of information contained in the article, and defend your answer. d. What part of this article relates to the concept of a "double dividend"? How do the Republican lawmakers and their environmental opponents disagree in this regard? 4. Imagine that there are three industrial firms in Haze Valley: