Economics and the Environment
Homework #1
1. Do
the following using the various tools suggested in the question:
a. Using supply and demand, explain
how the Brazilian government exemption of agriculture from taxation contributes
to deforestation of the Amazon rainforest. (Note: Exemption of
agriculture from taxation means that there will be an increase in demand by
non-farmers for regular agricultural land as a tax write-off. As a result, many
farmers will leave regular agricultural lands and move to the rainforest where
agricultural land is cheaper. Why is it cheaper? Because
government taxes unimproved land in the Amazon at a higher rate than improved
land. This gives settlers an incentive to cut down the trees to lower
their taxes.)
b. Suppose that (1) investment
projects in the Amazon are eligible for a 75% tax credit by the Brazilian
government; (2) a particular project develops land for 100 farms with the cost
of clearing the land and building roads of $1,000 per farm; and (3) each farm
would generate a net revenue stream whose present value is $400. Explain
whether this project would be built in the absence of the tax credit and how
the introduction of the tax credit affects this decision. Then show a
supply-demand graph which illustrates this situation.
c. Suppose a cement plant emits dust
which settles on nearby properties and causes various amounts of damage. Use a
supply and demand framework to show the following:
(1) Show what kind of tax must be
imposed to eliminate the externality. What kind of welfare loss is associated
with such a tax? Show and explain.
2. Using
information from the Stroup and Shaw article and the in-class discussion of
subsidies do the following:
a. Stroup
and Shaw argue that farm subsidies are one of the major reasons why wetlands
are converted to farmlands. Show and explain how this occurs and why a welfare
loss occurs.
b.
Be sure you can explain how the combination of farm subsidies and acreage
restrictions can lead to excessive pollution of streams and groundwater.
c. Stroup
and Shaw argue that water subsidies to farmers in
d. People
who build on coastal barriers where destructive storms frequently occur receive
numerous subsidies that allow them to rebuild in the same place as often as
they want. Show how this results in excessive development in such dangerous
areas and how a welfare loss occurs (otherwise called a major misallocation of
resources).
3.
Use the Coase
Theorem to solve the following problems and explain your answer.
a. Suppose a
cement factory and a laundry are located near one another. The paper mill (PM)
has initial profits of $300,000 and the downstream farmer (F) $100,000 when
neither has taken action to clean up the water. The farmer incurs damages from
the water pollution of $25,000, the farmer’s costs of cleaning the water are $15,000,
and the paper mill’s costs of installing pollution control equipment are $35,000.
Fill in the table and then show the results of applying the two property rules:
Rule #1-the property rights to pollute the river belong to the PM; Rule #2-the
farmer has property rights to the river and may sue to recover damages.
b. Suppose the initial data on profits from
part a. is the same but the paper mill drastically increases its pollution. The
farmer incurs damages from the water pollution of $50,000, the farmer’s costs
of cleaning the water are now $40,000, and the paper mill’s costs of installing
pollution control equipment are still $35,000. Fill in the table and then show
the results of applying the two property rules: Rule #1-the property rights to
pollute the river belong to the PM; Rule #2-the farmer has property rights to
the river and may sue to recover damages.
4.
Using the concept of marginal user cost
developed in class do the following: In a three period model, suppose that U1
= $10, U2 = $12, U3 = $13, and r
= 10%. Explain what must be done to achieve a dynamically efficient allocation
of a resource over three time periods. Show your work.