ECO 330T Fall 2024 Midterm Practice 1 PDF

Exam 1 ECO 330T – Energy & Environmental Economics – Spring 2023 Answer the questions in the spaces provided on the question sheets. For the multiple choice questions circle your answers. If you run out of room, continue on the back of the page. The exam is out of 100 point...

Exam 1 ECO 330T – Energy & Environmental Economics – Spring 2023 Answer the questions in the spaces provided on the question sheets. For the multiple choice questions circle your answers. If you run out of room, continue on the back of the page. The exam is out of 100 points total. The points each question is worth is in the left margin. SHOW ALL YOUR WORK FOR ANY NUMERICAL QUESTIONS TO GET PARTIAL CREDIT. CIRCLE YOUR FINAL ANSWERS FOR NUMERICAL QUESTIONS. Name: ANSWER KEY  (5) 1. Give one argument each for and against EITHER gasoline taxes OR fuel economy standards. Circle your choice: TAX or STANDARD. Argument for: Possible answers: It encourages drivers to buy more efficient vehicles and to drive fewer miles Argument against: Possible answers: It is a regressive tax, so people with lower incomes get taxed proportionately more; it is politically difficult to pass. Circle your choice: TAX or STANDARD. Argument for: Possible answers: Politically feasible; it did lower emissions in the US, espe- cially at the beginning of the program Argument against: Possible answers: It may encourage people to drive more; loopholes and exemptions may lead to larger vehicles (2.5) 2. Circle all that apply: Consider a market for cigarettes. Cigarette is an addictive substance with a perfectly inelastic demand in the short-run and an upward sloping supply curve. Smoking generates significant negative externalities, such as increased healthcare costs due to smoking- related illnesses and the harmful effects of secondhand smoke on non-smokers. A pigouvian tax on cigarettes will have the following consequences: A. A pigouvian tax will lead to a decrease in quantity of cigarettes purchased in the short-run. B. A pigouvian tax will increase the price paid by consumers in the short-run. C. The tax burden will be borne by both producers and consumers in the short-run. D. A pigouvian tax may lead to a decrease in quantity of cigarettes purchased in the long-run but it will have no effect on quantity in the short-run. (2.5) 3. Circle all that apply: The market for oil is in contango. This means: A. Futures prices are lower than spot prices. B. Futures prices are higher than spot prices. C. It encourages more oil to be stored for later. D. It encourages oil in storage to be emptied to sell now. (2.5) 4. Circle all that apply: Company A and Company B are cement producing companies. The processing of cement produces carbon-dioxide which can be regulated with a cap-and-trade regime. Company A emits 100 units of pollution, and B produces 200 units of pollution. Each company is allocated 150 pollution permits. They can either abate their pollution to comply  with the cap or trade permits with one another. The marginal cost of abating pollution for Company A is $20 for each unit of pollution reduced, and for Company B it is $50 for each unit of pollution reduced. A. A will abate 50 units because it’s marginal cost of abatement is lower than that of B. B. The traded permits will be priced between $20 and $50. C. B will abate 50 units at a cost of $2,500. D. There will be no abatement by any company, but A will sell 50 permits to B. (2.5) 5. Multiple Choice: Suppose that the market for oil futures is in equilibrium for risk-neutral traders. There are no transaction costs. The expected spot price for oil in one year is $57 a barrel. What is the futures price? A. Less than $57 B. $57 C. Greater than $57 D. Not enough information 6. Suppose there is an exhaustible resource which is extracted over three periods, and that  2 1 1 (P1 − M C) > (P2 − M C) > (P3 − M C) 1+r 1+r (5) (a) Yes or No: Did the market extract efficiently between the periods? Describe why. No, the dynamic efficiency condition of equalizing present value of marginal net benefits is not maintained. (5) (b) Should the market have produced more or less oil in period 1? Why? The market should have produced more oil in period 1. The scarcity rent is higher in period 1, so moving more oil to period 1 will lower the price and also the scarcity rent. 7. Assume crude oil is extracted over two periods, Suppose that there are Q1 + Q2 = 19 barrels of crude oil in the ground. In each period, the inverse demand curve for crude oil is given by P = 100 − 2Q. The marginal cost of extraction in each period is $60/barrel. The interest rate is r = 0.1. (10) (a) Plot the present value of marginal net benefits (PVMNB) from both periods on a single plot as we did in class. Use the left y-axis for period 1, the right y-axis for period 2. Label the price level at which each PVMNB curve intercepts its y-axis, as well as the width of the x-axis. t −M Ct ) PVMNB is calculated as (P(1+r) t for both periods  P V M N B1 = 100 − 2Q1 − 60 2 −60 P V M N B2 = 100−2Q 1+0.1 (5) (b) Calculate and compare optimal extraction in both periods. Equating PVMNB from both periods we get: 100 − 2Q2 − 60 100 − 2Q1 − 60 = 1 + 0.1 Plugging in Q1 + Q2 = 19 and solve for the equations, we get: Q1 = 10, Q2 = 9 Extraction in period 1 is greater than extraction in period 2. (5) (c) By how much would a carbon tax of $10/barrel reduce total oil consumption (i.e., Q1 +Q2 )? Hint: How would you represent this graphically? You do not need to do much math! If you shift the PVMNB curves down by $10/barrel in nominal terms, they will still intersect above the x-axis. Thus, the total amount of oil consumed will not be affected by the tax. (5) (d) By how much would a carbon tax of $30/barrel reduce total oil consumption (i.e., Q1 +Q2 )? Hint: How would you represent this graphically? If you shift both of the PVMNB curves down by $30/barrel in nominal terms (i.e., before discounting), they will each intersect the x-axis before they intersect one another. Thus, the resource is effectively infinite, and we can forget about Hotelling’s rule and go back to a scenario where we set MB=MC like in typical static problems. This is equivalent to setting MNB=0 (either in nominal or in present value terms, it makes no difference). M N B1 = 100 − 2Q1 − 60 − 30 = 0 ⇒ Q1 = 5. M N B2 = 100 − 2Q2 − 60 − 30 = 0 ⇒ Q2 = 5. So the tax would reduce total oil consumption by 19 − 5 − 5 = 9 barrels.  8. Circle your answers for parts a-d. Suppose the United States decides to institute a consumption cap on coal to reduce greenhouse gas emissions. No other countries join this policy, and this is the only policy in place. (5) (a) The price for coal around the world INCREASES DECREASES (5) (b) The consumption of coal outside of the United States INCREASES DECREASES Suppose instead, the United States decides to institute a production cap on coal. No other countries join this policy, and this is the only policy in place. (3) (c) The price for coal around the world INCREASES DECREASES (3) (d) Production of coal outside of the United States INCREASES DECREASES (4) (e) What is one thing the United States could have done in the above situations to eliminate emissions leakage? Possible answers: regulated both production and consumption; restricted trade (5) (f) What is one thing the United States could have done reduce emissions abroad? Possible answers: buy coal reserves from other countries and then keep it in the ground; multilateral negotiations  9. Consider a natural monopoly in natural gas distribution. (10) (a) Graph the marginal cost, average cost, and demand curves. (10) (b) Suppose a regulator implements linear average cost pricing. Use the graph above to: (1) Shade in and label area the that represents the firm’s losses with “LOSSES” if applica- ble. (2) Shade in and label the area that represents the deadweight loss with “DWL” if applicable. The firm should make exactly zero losses in this case, so there is no area on the graph that represents the firm’s losses. Deadweight loss is the triangle shaded above. (5) (c) Propose an alternative strategy the regulator could take to could increase economic surplus in this market, and explain how it would work. Possible Answers: The regulator can use (1) a two-part tariff with a price equal to marginal cost and a fixed charge to recoup the fixed costs; (2) linear marginal cost pricing paired with a subsidy transfer to the firm by the amount of the losses.