Economics 5250/6250 Dr. LozadaFall 2014 Midterm Exam

This exam has 33 points. There are six questions on theexam; you should work all of them. Half the questions areworth 5 points each and the other half are worth 6 points each.

Put your answers to the exam in a blue book or on blanksheets of paper.

Answer the questions using as much precision and detailas the time allows. Correct answers which are unsupportedby explanations will not be awarded points. Therefore, evenif you think something is “obvious,” do not omit it. If youomit anything, you will not get credit for it. You get credit fornothing which does not explicitly appear in your answer. If youhave questions about the adequacy of an explanation of yoursduring the exam, ask me.

Answer all of the following questions.

1. [5 points] Define the “Theory of the Second Best” and give anexample of its application.

2. [5 points]

(a) Explain the Coase Theorem using a diagram with “marginal ex-ternal cost” and “marginal net private benefit.” Assume the pol-luter has the property rights.

(b) How might this explanation fail if, instead of the polluter andthe pollution victim negotiating just once, they may do so re-peatedly?

3. [5 points] Suppose the government uses a subsidy to regulate pol-lution. Show on a diagram the loss in social welfare if this govern-ment is fooled into thinking that “marginal external cost” is smallerthan it actually is.

4. [5 points]

(a) This question concerns Figure 1. Suppose a consumer is ini-tially at point A, enjoying E1 units of an environmental good.The government contemplates moving the environmental goodup to E2. What value does this consumer place on this increasein environmental good? Answer this in terms of willingness topay, willingness to accept, compensating variation, and equiv-alent variation. Draw your answers on the graph, and explainyour reasoning.

(b) This question concerns Figure 1. Suppose a consumer is ini-tially at point B, enjoying E2 units of an environmental good.The government contemplates moving the environmental gooddown to E1. What value does this consumer place on this de-crease in environmental good? Answer this in terms of will-ingness to pay, willingness to accept, compensating variation,and equivalent variation. Draw your answers on the graph, andexplain your reasoning.

1

Figure 1

2

Figure 2

(c) This question concerns Figure 2, which has nothing to do withFigure 1. This figure describes two people in the economy, onerich and one poor. Both consume the same amount of the envi-ronmental good E . The government contemplates moving theenvironmental good from E1 up to E2.

i. What value does the rich consumer place on this increase inenvironmental good in terms of willingness to pay? Drawyour answer on the graph, and explain your reasoning.

ii. What value does the poor consumer place on this increasein environmental good in terms of willingness to pay? Drawyour answer on the graph, and explain your reasoning.

3

Figure 3

iii. What do your answers reveal about the role that consumers’incomes play in willingness-to-pay valuation?

5. [5 points] Define “contingent valuation” and describe one advan-tage it has over other valuation methods.

6. [5 points]

(a) This question concerns Figure 3, but not its main point (whichis how very many political advertisements appear on U.S. tele-vision before elections). Instead, I want you to explain the con-nection between the man spraying something and the womansaying something about “another hole in the ozone.” Whatis she talking about? [The comic strip is Non Sequitur from10/24/2014.]

(b) This question concerns Figure 4. What does it have to do witha discussion we had in class? [The comic strip is Non Sequiturfrom 11/07/2014.]

4

Figure 4

5

(!) fl ~ .,( jt. Se,-! ,!,Ls f 57$ ,/l,-/ r.f ~ &..- t1I 111&:. M u,.j'vkc!,i,,,s

w,11-- N > t ~ ~ ~n'-,h( ~ ~ N of~ ,~kttJt7n.S Yk.:jkf

d.e,~A-Je. 5o ~-d ~ !{we.

/vil1 ~.J t:--k ./1.e_ ,, /.os.er5 "~cf 1~U ~ )u../l,r olf) I/~, /). S. ec, ...

/c._,w,.e,, 5 1 4'1t.s ~ h-./rJ~A--J /(5h) Je ~Se ~ do ko+-ft fe<- rk ~k""d

pt7Jlvp'n.. U?.rfs (~ kkb ,e,,, ~ fkJ-h-h~J.es). G l'h-11.~l,d fl_ ~f(

1"A ~ t,r ~ c., f eiJ P-,.. .f ur 1i. -£ ~ .s ,.,,_ A e;e ,eo ol!f J /:Jv..r, ~~.s / ,,J.:&..

TYl-~1,d U. S. ·Ct,r-k ov+p., +. ?L.~ ..,..') b ! W!-J~ -~ dv 4 J ov-er"'ll : e4~~--/,~

-J .rLe t-tvitr b:; {ttdt w~vl&. ~,u~ we)~e, ""+ ;f Ct41~s c; ive/f4e- 1-eJu~"J

/htre-Me- ,~ f,,//.,,-1-fon. 1 a,..,J r.f :S v>tde~ 1.vl;-vl.. -efke-+ i? f~Jt.r-

4~ U"'--p& ts 4 fol/,A,1 ~,e, l1f. 1k ~ro1) m~ hf i>·-~r,~c/,~

c ti-v u ~ wf f iA .Jo le -1,:n, J>t,,,,dJ . fh..t_ ft? II v -hd' rn k µ ;u-,. r, .fe vhv-. c tw Se:s

6vfrvt .Jo~ -fu-o /) e. ~ Jd4r, fk /wo ,~.(c,.J,'p\s ftJyh'lt7 C~cd eti.cl..

~ ~vf 1 ~Jv /-1,J I"'- ovff,A be.~ j f,:,JS{b JJ ~~ ~ J~ it> ~ So 4-a.{t)

bp-h>-vi6-t iwf},,:f-. ~mp1n·"'-3 6c:,-(l /)t..,r--k!"-h~s rs we..l/4.e -,'h-.fn1nd' Jvf

J ~·s ~,f- f" ss d k1 ~ 11 k'-h4-~,f 11 ftJ-l/ e/ ~J 7vst rf>I.L el

~ /Y"-~?.ekf7>,o..S YH-ijU be k)~ - ~Iv ~7.

a-)

fri.G,. r"""- e )dc...._<lf t.:. rr : fa1 I:? c.

Ji.1.~ r~ N~ f.,y~ &c...t~t ·. htJrs

l?v1pi.t : G.. !iVf/3

/~-}-,'-I()' {4 f•/1 .. -k JoeJil> QT

j/YI u ./1.e. polL·hirn V1~ hJ:-s 0-.,

lw,xry 110/vts. II~, !l..ev17J...,.._

;s 1¢,u.ir! &...ti ~b~ ~ f>~ A

/;,v. '- nt~fhJ..f Hd.-1,,f,~ A ~.J

lv L/k ~ /r"'- ~ w-iJl 'o iJo ti/ upr

~o 117 'rl.J..; ee avffu+ rh&-r- f1 Nl!:J . s(? t- bA{'~'y. wl,I. k-e !"~" J<.. ~+ 1,.. pY'· ~ Ae~ o c;.,..d A t 11..e \il--i.-h~ P'i1 -14 ,.,..1..e to ~ ~ a . .-f~-, ~1..o ~ dcCA-u.k.r tt/-lfvr

/.-....._ q ''} S:,-, c, B > E, -11., v>Lii».. unU 1-lr" w,:.,f- .J,, f '7 ),,, ,1.,,.,.. Ii t:-d B

~ pl-~ /.r1+.. -h> r-( ~LO Yu t;,c.,+ ~ QI I (..) L,-u.._ ~ /,r».. wiU L~ t-.

{ 14 V1l/hn.. B Lcn1,L.) ~ f 'j vp fP B; ~ I~ 1v1U uupt ~'J~o t-b~ E.)

1le, rw leSf S~s w1- F. To r-ek~ ~ /;21- / ft-e -brJ>.. t.vwlL J.ef',}..c_ 4 i~s+ G)

wkl_t vi-cAn--.s WNltf b.( i..r,U '1 ~d /14~ ~ f~ 1.Jf ~ 1-1 ! ~ 1~ l-'1-0 ~~

)YDVJ.. &l,.

b) fvfpok a,i Q ~ Q1f1 ~lr~ O~J *'~rnd, Jf4u uvf;iv+ ,/ fie_

in111rr... P'js r. s;)'\(.e_ J' < A :: Vi"Z,1,~ 1 i.,i [L:,klI ~ 4 4,b,l.-.f-;-fc, fJ ,, f#.f-t-! ~)

4-Jw~d. ~ 1/\-v/i)h ·wovlJ &..t~+ ~ oif'. Jir>w~, ~ lfl-Z.-bM ~ J/rl7 w&.:f fo

~)"twbLiJl d_ t-£.pv-ti.d,e,.._ k, ~~ ''-1n,r1---;' So &.! -h, L A.e-fk 1\.. fh MJohz..-b'v-,..5./

~~ /4 vn~ f.t&-1 ln. ~ rtj-t:d- ~ o/k o/ T.

So ~ll) o~~ ~"'"~1°4

S vb~ i d"J i "<ot e,/..os°"'-.S 1h u ~ jOll<-rl'lll'I~ i.S fi,oi4,J '-bout MeC.

m~r"Y'~ C'vbs.,J~ "s vb" I

5,b, ill:J' e4 d.. U ,.,;f of $, !£;, }k.. Q 1f ~ U.ves. '• Svb " u..:JI o.f' Job< :Jj ,

l oWrn~f; ; ~h ,, J11l.:. i, {.)~ A EC ::, hlJP '3 71...:s Svb>i &) i's too s~ll? Je> bvf-pvf t,..ri l\ · he~ b,J.

hrnt: if { Vk...f J..t..~ h})PB-< Si.-h 1 ;f '.s ~#er tto+ -kfn.dvu fkvMt

( Los ''q h N f 6) '-,,,) Jeff,"J' Ii, JvL•'J ( f 4-.>..'J J.b "). 0 ./1..,, i.n-r._,

1r~ bt,{k---~ fYOPv te- fu Cl~+. >o ~,,h-Y~ ~u fo -fr,.. Ct, •

~ J<>~t.,{7 -oph~ bt.-fr-+ ~ i~ a»- i ;f ~ > t/'\ ~ 1/J..,.1)" L-,~, & :t­

~ ME (. '> l-7 N f J3 5 0 fy{ Jo l:t,,!J l, k J.a,>-e&-H.a.. • j V\, .f1._t S ;'.Jv 4 ·h}..._ o {.-- fk_

4,45r~1 Q'> &..~ iJ k.~ proket_d.. 1 ~&.-h1 Mf.l-f;NPB .Jee;-~ f.osse.s.

ke l.-we,,,_ Q. "',: t,......J t2, 1 wL.u ,s ~ >k-t.kJ £Te4,.

@ ~ lie di,-4,r,»,. &>- #-c ~ f ?~ e .

~ WT F ;s C 5 : if k ftJe.s ~ 4 -h C , k ~ p~ C 8 a,./ HtZ( _/

fat Ju., wv,S~ zJf' {)._~ le t.JdS ed A .

iJ A 1) : ,I ).Q. AA.ti J~ fr, c_ I i 'd &do7 1/·kt.7 Us/ s O

if JOv tlv,.. '(: l.£+ Lho.;jo -lo cl ~ l--eJv1W2S A]) of o~

Joo tis 1e> j# ).,,rn ~ ~ .

~ ~1,,1,fj V 4,Z,-/, n,, · ,/ Lu do .fl, { p ;;.,,,,_ F, ~ E,..) ( w L ,4 ,1

11 c V '' ~ ~-.....) / hvw """'t,1.. 4.lw It/ -11..e t:.Jt,.rf ~ lJTf: S-o

H t'V •I CV=LJ,P.

wrr i.s &c? i'i1-IJYk Jo woi& M,~1 h.n.. s ~ f. fli:>1J 1vA?f ~ t!p 4lt511/d be lJT P ./ /1..l ~ 11 m-1,,..--( d,-J ho f do ''fl-r 11

( '/i:J A ==

~ h(r;,,, f 1-,-},. E,) I So ft rs EV.

W'f A i.S AF { Lv Lv~ ~ ~ ~J-t+,i b'-e,K /.o u¥ (<,A 11..t /dt J)\ f l)

rn,o,-etf Lni ~ B 1-i, F. ~3 ",I w~ k 4-s ( ~ ~ E2-

fp f1) i3 4- CV 1-SJve.

0, h~: C V KS ~ (1)\ 7 wel/4-t yrt.tJJwe. w Lu. rJ 11-e J ~ ,>-. (ti.) a,.,J { /,) .

"--"?

c) I

- - - - : - - - - - - - --: 1- : tl p<,<-s 11'\ 15 WT p

I I I I

I

I I

E I

I

I ~ - ' p ~ rpo« ptk51:w..S, WT

------l--!=--

4J1P is fte_ ~LI"-+ o~ ~ rds ~ f4Jin,. I~ wi'llu ~ 4,Jif_e-f,, if1'1-e vr ,\ tr,~ -Ii,~~ E, -lo E2 . ~ n--U. r-,-1~ ~ WT f > ~ f"?Jr}Ur-.JO?<. s LJT P 1 / """7 ~CAvu fJv ft?UY" FJ~ h,A-s Ji:;, h 110~ ;-m,Js "~ ~

;1'v-e.11r 1l.v kfll7L:b ~ Vb~ o/ ;n~ k,J,,,-1,~ ,,.._ lJ{f v~l.r._f,b>J:5.

I{ .f1t fog{ p<,r.trrn 's 111.di /f4...e,... r.-e. t:v~ ~k..RJ k k. e

I

I f1-

~ ~ f"'.ttnt wl...o ~ J7orx ht1.5 M> a,, l:17 /,:, fay ~p "t,~ yoo~ls "

I,;, "'take l."""' 4.J ~ o If d ~.1. M ~ ,1 t:.. f ~ . 11,s 11 w T P " i"J 11.. vs

Vkthi}o.Rc1.., c /+ fS ko1 i!:l-tO.) (( Wtf 11 ~~5 Ir wi'U.1).e;/ ~ &t,·L.''

t?> f"j, ,, u.:,-r j'-Jt ''iv;lL.nj~S~ tr; P'j· 11

I I I

I I

I I 11.JiA@=-EV I I I I I IA --- - · ----·- ............

Figure 1

2

I

:t..rrP©=cv Ur I .13_ -- - - - -

U3 < U4 < Vs

(n...e Jvb.St-y,f'1J 3, L/, a..l S ~ ti,r I, ,-fr~J . )

\ {I) {,,,. I,~ V ,A,,~ I,;-..., 1rf & .J. V ,t,/v~ 11,,,, - In 4 k./ed r,& by .(f,{;} ,t,,-., &_ ./1.,,r

will.~ -h? pj "'"t.nlt'l'JNS~ -h. t,..e~-t £.r 1~t""4-~J c~) ~ ~ ... t ,d

fvtA.- Jt9ocl.s. Ex~pf.£ : <i If cu rvtvd tre Jlft.L lol?l1a -k f'; fo s~ ~ wkt.ks: ? 11

Pr..t q_Jv~Jt..,_ ;+ J..a.J B ~d 4 C4. Cinic.L,.~ ~ f 0 Lt'7 'r-'-4-/J'o-J..../ i'i..d.;,1,.)

~J ~ro.\-4-h~ b1'\eJ. 0& ~ds ~1/ V)\ ~, p~c.es, lov1

1.,_ rx~ ~r,~us ./-o k ~!~,( 11..e ri'tvd,/l)o.. m1.11f 6e... ~, n,qf-

~ ~ }4-lrlJ_ .

@) ,d CF l ; , ~ s ,,,L,,1.. CM., -li.n,, '"rf J' ~ f wH... ', u a>< l7e r-,

i.,e,.e '""'f""LI f ""1"'1' 11,,.J.s j),. 'f "'j C4,,,5 • /, f1,_,, k dy,, "f">'dO

,. 'f 'j ca-- ..dL&.-t:i cr-c 's, IL, ,J.,,~7 dkd><f 1/... .~ '!""· ~fl} d., "'-( /:-/<,-,d' '/,,,, h It J... /e • ,1. .ft._t D ~ ,, ey---, ) fl.. '' J.... ~ "

,1'. -ti.€ Dzv>--e ',u J-.e<fe.d -h 11.e 0 ° vvj, 7 f'L--,._ ~ Sr /!)/ ~ o~ 14:; er

11,,. ~ 4rc.iz: 4.J ,4.-}--ww-L-j,'"{...

~ l'.i 1,,~ 1,1 ,.,,...0 15 'j ., : t. .J,,.,. J ,' M So """- kJ ,-,_ h,.,,1,t, 'I' t.,t.th o/ 54"4.C(_ Svd tt.S jv~j . .(jiu 'jl))6.,( w4-vti.,.o :s ._ ~) 11 ~ J..cil

me/W\, ,+ 13 dvl,iov.s 11,~ -M ;J- JA-rvl/ be 1~j_ w ~rw l/~7cx~t-.

~ /n '4t-f lkQsf ~Cz"e. .. Ji,-'- ikal ~ "l~d #.eJrte! hetGJe.. ~ Uv/d

,'h f"'"""lJ t.a iJ e r-e/:.-J..erl by i/vye ~rn'td tvi·4 CfL, ~ ;f k. ~

~pcds ft..~+~ A'1pe,,.. {rvd.. M ~ /Le Jetffl. ~J of c4·1ea1e.))

tJr ; { h-o ON ~~ d-s a >'-if 1~ ~ f -fk-) f-o d;. /kr mv a If\.

wd.11~) t,,rw111sf~ee~ (.rvvt. 1.1 ~ 11-.e- ~) o/ Jr~·ry).