: i tal Economics he Paper : (DSE) (v) Environmen| Nee ft Course : B.A. (Hons.) Economics III Year lam! : ‘ semester : § Hom ation ; haximum Marks : 75 aaa BLA PA i ie ‘All questions carry equal marks. Attempt any five questions. Q.1.(a) Suppose a society consists of three individuals A, A,, Aj, Their demand curves for clean air Q are given by Q = 20-P, Q = 24-P, Q = 16-1/2P, where P, P, and P, are willingness to pay for individuals A,, A,, As respectively. . Suppose the clean air can be produced at a constant marginal cost of Rs. 20 per unit Derive an efficient quantity of clean air. Show it graphically also. 3 (b)- Consider a case of a stock pollutant such as CO, in the atmosphere Emissions of CO, in each time period t is ey MS((e,) is the Marginal Savings from CO. emissions .and Marginal Damages are the function of total stock of CO, in the atmosphere, MD,(s,). Now assume that world consists of only two time periods t=0, 1 (today and tomorrow) and the initial stock of CO,is zero Also assume that pure rate of time preference is zero implying that one cares for to today. For such a world derive the exact efficie emissions today (t = 0). Interpret your result. (c) What are the components which contribute to water pollutio: + 09 _ in India? any five steps taken by the government to control water Pollution, 7 Ans..(a) Since it is a public good, the- market demand is derived vertical summation of the curves. eke oe P, = 20-Q and P, = 24-Q and P; = 32-29 Py+P,+P, = 76-49 = P= 76-49 {Market demand curve} MR = 76-8Q At the optimal level MR=MC => 76-8Q = 20 Scanned ith CamScamner390 AMAR : B.A. - 8 > = 5 QeaT7 = ‘MC 20 d Rese @ (Quantity of clean air) avings = MS, €,) (b) Marginal S: un Go Marginal Damages = MD, ; : For athlon. we need to maximize the net benefit (from both time period 0 and 1). = -D, (8) Net Benefit = (Sp.(e,) ~ Dy (Sp)) +B (S, (ex) - a Gr Here p= 1as the. pure rate of time preference is 0. Also note that S; (e) and D,(S,) are total saving and total damage functions. . Net Benefit = S, (¢,) - Dp (S_) + 8, @) ~ Dy (+ ey) eis, For efficiency, we take the derivative of the above expression with respect to ¢, and put it equal to.zero. ANB _ AS ple) ADA CS) , ASy(e,)_ Dyer +4) ‘ ey ey eo Ay 8 = — MS, (e,)—MD, (S,)~ MD, (e, +) =0 (note that €, = Sp) > MS, (e,) = MDp (S,) + MD, (S,) This conditions tells us that instead of equating marginal savings of time 1S gs period 0 to marginal damage of time period 1, we equate it with sum of damages over two time periods. This is because of the stock pollutant nature of CO,. (c) Water pollution is a major environmental issue in India. The largest source of water pollution in India is untreated sewage Other sources of pollution include agricultural runoff and unregulated small scale industry. Most rivers, lakes and surface water in India are polluted. es joo sewage. A 2007 study found that discharge of untreated sewage india. The 2, a important source of pollution of surface and ground water in nraear ie Tadie ate oe between generation and treatment of domestic waste capacity but also thee he nts Dot only that.India lacks sufficient treatment pacity but also that the sewage treatment plants that exiet do not operate and are not maintained. P ° ° closed meat at te tn eeerament-owned sewage treatment plants remain i imprope: i . feliable electricity supply to operate thar] ion oF Poor maintenance oF lack te the plants, together with absentee employees Scanned with omScanner(SE) (vi) : Environmental Economics (Sem.-VI, 2016) 391 and poor management. The waste water ercolates into the soil or evaporates. The u P’pan areas causing nhygienie conditions jnto surface and ground waters, Surface runoff. Surface runoff (also known as overland flow) is the flow of water that occurs when excess stormwater, meltwater, or other sources flows over the Earth's surface. This might occur because soil is saturated to full capacity, because rain arrives more quickly than soil can absorb it, or bece-ase impervious areas (roofs and pavement) send their runoff to surrounding soil that cannot absorb all of it. Surface runoff is a major.component of the water cycle. It is the primary agent in soil erosion by water. Runoff that occurs on the ground surface before reaching a channel is also called a nonpoint source. Ifa nonpoint source contains man-made contaminants, ornatura! forms of pollution (such as rotting leaves) the runoff is called nonpoint. source pollution. A land area which produces runoff that drains to a common point is called a drainage basin. When runoff flows along the ground, it can pick up soil contaminants including petroleum, pesticides, or fertilizers that become discharge or nonpoint source pollution. : In addition to causing water erosion and pollution, surface runoff in urban areas is a primary cause of urban flooding which can result in property damage, damp and mold in’basements, and street flooding. Here are the top seven ways to Prevent Water Pollution. 1. Sewage treatments. The household water should be treated properly 80 that they become environmentally safe, Adequate. care should be taken to ensure that effective sewage treatment process is in place and that contaminated water does not get mixed with the environment, in order to prevent water - pollution, human and animal excreta should be prevented from mixing with its sources. Construction of pit toilet and proper sewage treatments can offer some solution to this problem. ’ 2. Prevent river water to get polluted. The flowing water of the river cannot be cleaned easily by natural process. Since, a large number of external substances are discharged into the water, the river water’ becomes polluted. This may cause diseases to the people using river water. Thins, every effort should be made to prevent the river water to get contaminated. People should not be allowed to throw wastes into the river water. 3. Treatment of wastes before discharge. Factories are expected to treat its effluent wastes prior to discharge. Toxic material must be treated chemically and converted into harmless materials. If possible, factories should ty to recycle the treated water. 4. Strict adherence to water laws. Laws and legislation rélating to Pollution should be strictly followed by all. People should be made aware that, adherence to water luvs are in their own interest. 5. Treatment of drainage water. It cities, a huge amount of water is ‘0 drains every day. The water that flows through the city drainage system Generated in these areas normally collected wastes accumulate in the and releasing pollutants that leach Put int Scanned sith CamScamnerA J ORE ee ini Economics IE 392 AMAR Hi 3 8 S 8 e & 8 By pp a - be remove ful pollutants be reme should be properly Hors et hie ‘water allowed going into introduced into reservol" : without treatment, it will pollute them. 4 towrie usually sore elite ig cities ant Pi . tmont plants. Big © jszolved materials. Chemical 6. Treatment plants: Ariter out undilved chemicals. Tie treatment plants. © te out unwanted 7 h treatment is also given to separa vo the water reser voirs or refused in tat inl owed to go in? ming if the fields to treated water is eithe! © ter is used for farming be i the treated wal houses. Occasionally, its. ce ‘eini water treatment plants. ; irrigated te inthe vy one rican and safe. Washing, bathing of cate 7. Keep Pi t be done. Washing of dirty clothes in the pond that is used by human Sao aicty and winsuitable for human use, ‘and bathing of cattle make the pond WAT". a of severe consequences, If these ponds are continually misuses; then itmay . . Q. te) Imagine that there are two identical firms @irm1 and Firm 9) thgt save money froin polluting the environment. A fiend s marginal savings from emissions of an amount “e” are given yy e”. The two firms differ in their.impact on ambient pollution concentrations. Two units of emission from Firm 1 result in one unit of ambient pollution. Firm 2 has twice the impact on the ambient environment from the same amount of emissions. (i) What are the transfer coefficients for each of the two firms? (ii) If firm Lis given two emission permits and firm 2is given four emission permits and they are allowed to trade then calculate the permit price and the number of permits held by each firm. (ii) If'instead each firmis given two ambient pollution permits to trade, how much will each firm end up emitting? Calculate the permit price. 1,8,4 (b) “An optimal economic response to climate cha i 5 "I . i" consideration of discounting and value judgements.” Comments 1 Aus. (a) (i) a, = 1/2anda,=1 Gi) MS = 10-2e 10-2, = 10-2, =, & = . and e+e =6 = e, = ot =3 , 1 Permit price =n = 10 - 2¢ = 10-263) $4 Gi) 10~2e, _ 10-2, va = s 20-4e, = 10. = 1 — 2e, \10 = 4e,~ 90 Scanned with CamScamner(SE) (vi) : Environmental Economics (Sem.-VI, 2016) 393 2 2e,-e, = 6 ~@ Firm-1 needs (1/2) e, ambient pollution permits, Firm-2 needs e, ambient pollution permita, 1 $6, gate =4 > e+ 2e, = 8 ~ di) Solving (i) and (ii) 2e,-e, = 5 2e, +4e, = 16 —be, = —11 ll += = é ; 18 id a: oo an “=F So firm-1 needs (\2)-2 permits and foirm-2 needs (i) permits. Price =n = 10~2e,=10-2 (2) = = fambient pollution permit (b) The choice of discount rate is critical to assessments of climate change policy. Most of the climate-related benefits from current policy efforts would take the form of avoided damages many years from now, whereas many of the costs would be borne in the nearer term. A high consumption discount ratel thus tends to shrink the present value of benefits relative to the present value of costs-and weakens the case for aggressive current action. Relatiyely small differences in the choice of this rate can make a very large difference.in the Policy assessment. The discount rate issue has become a source of significant disagreement. The Stern Review on the Economies of Climate Change gained considerable attention in supporting a policy of reducing greenhouse gas emissions by about 3 percent per year (relative to business as usual), starting more or less immediately.2 To support this conclusion, the Review employed a consumption discount rate of 1.4 percent.3 But several analysts, including Nordhaus and Mendelsohn , have argued that the Review's rate was inappropriately low, and that its conclusions. consequently are not well founded. Nordhaus, in particular, has argued that a considerably higher consumption discount rate has greater justification, and that once this higher rate is employed one can no longer justify climate.action nearly as aggressive aé that endorsed by the Review. His preferred model simulations employ a discount rate of about 4.3percent, Using his own DICE model, Nordhaus indicated that the differences Scanned ith CamSeamner394 AMAR : B.A. (Hons.) Economics ee discount rate accounte, d Nordhaus-supported. ; i teraletthe ea the more aggressive climate policy endorsed by for all of the difference be: Fee ey Nordhaus tern and the co! ly odest effor Si nsiderably more modes c haus. s been much debate about the appropria’ consumption discount here has bt h debate about th te an alt icy analysis. Nearly all discussions implicitly ee ote oestrone applies. We argue hat s fact to assume that a SiR jd that oneor the other rate will be appropriate depending Fist ae ee riterion. If the objective is to assess whother a given po on in Gugment eocial welfare (according to the postulated social welfare i i ore valent discount rate r§ W is appropriate, If Fe a eine ter tke policy would yield a potential Pareto bjective is to determine wheth« p : ieipeereeat (thatis, pass a Kaldor-Hicks test), the finance-equivalent discount rate rF should be used. Distinguishing between the two rates a major disagreements about “the” consumption discount rate. For one, i reso ves the debate about the extent to which the rate should be grounded in actual saving. investment behavior and the associated opportunity cost of capital, as opposed to less empirically based ethical considerations. When the evaluation criterion is the Kaldor-Hicks condition, then rF is the appropriate rate and a focus on market conditions (the opportunity cost of capital) is justified. When the evaluation metric is the value of a social welfare function, then rSW is the appropriate rate—a rate based on parameters that derive from ethical considerations with a less direct empirical basis (although empirical considerations might influence one’s views as to the appropriate values for the “ethical” parameters in the formula for rSW). Market interest rate for discounting. Investments in cleaner technologies.and abatement equipment, for example, require up front expenditures that lead to environmental improvements over time. For cases where. the pollutant decays within a few years, the time horizon for balancing costs and benefits depends on the lifespan of the investment—perhaps as long as 50 or 100 years. Climate change presents a more dramatic need for balancing costs and benefits over time because the benefits of climate change mitigation measures are linked to the lifespan of greenhouse gases (GHGs), not physical capital, and GHGs may remain in the atmosphere for centuries. How do we compare costs and benefits that are separated by many decades or even centuries? Individual experience typically involves trade-offs of at most 20-30 ee as one invests in a new house or saves for retirement. Businesses face soutien with similar horizons as they choose to invest in research and new ‘uipment. In each of these cases, the market interest rate plays a central role: it allows us to convert cost: i ints in time i 8 and benefits at different points in time into comparable costs and benefits at a single point in time. mo, a) Aseria @ monopolist in a goods market.who is a polluter- fanewitial ae igure shows the demand curve D for the good (X) produsin anate curve MR for X, marginal private cost MC, of © i and marginal social cost MC, for the same good. i) Identify the profit maximizing level of output (y) and socially Scanned sith CamScaner| | ! SE) (vi): Environmental! Economics (Sem.—V1, 2016) 395 imal output level (X,) in order to establish that X, is less than X,, (i) Indicate the deadweight loss associated with the unregulated output of X. j ' (ii) Redraw the figure by moving around marginal social cost rve MC, such that the profit maximizing monopolist produces more Shan the socially efficient amount of X (Ky is more than X,). (iv) Now refer back to figure in part(i) and suppose that ernment introduces an emission fee thereby raising the marginal private cost of producing X (MCy to marginal social cost (MC,). Identify the output level (call it X,) with the emission fee. How do you explain the change in the deadweight loss resulting from the imposition of emission fee? 1,1,2,3 : oR (For Visually Handicapped Candidates only) Identify the deadweight loss associated with a polluting monopolist who operates in,a goods market. . 1 (b) Explain the concept of excludability and rivalry in the context of public goods and bads. In which category would you classify the following commodities? (i) Acid Depositicn (ii) Forestry (iii) Carbon emissions (iv) Uncrowded parks with controlled access 2,6 Ans. (a) opti Rs s. A B D G@) X, is found out by the intersection of MC, and MR. X,j is found by the intersection of. MCg and demand curve, D. Gi) Loss in consumer surplus from reducing quantity from X, toX, = ADF -ABC = BCFED Out of this lost surplus from consumer, BCED ie gained by the producer as eir revenue, ® Hence the dedueignt loss is = BCFED — BCED Scanned sith CamScaner396 ) = CEF (the shaded area) ; c pal social cost is really high. Consida, (ii) This will happe? when M: the following diagram. Rs. ‘Quantity of X a MR The output level X, is found out by equating MC, to MR. Consumer surplus before the emission fee = ACE ~ Consumer surplus after the emission fee = ABF Gain in producer's surplus from the lost consumer surplus = BCDF . Hence dead weight loss = ACE ABF - BCDF = FDE (the shaded area) * (b) A good is rivalrous if one person consuming it ‘uses it up’, meaning someone elsé cannot consume it. If you fill your car with petrol and thenuse it up, nobody else can use that petrol. If you eat a sandwich nobody else can eatit. Those are rivalrous goods. However if you create a beautiful painting that people enjoy looking at, the painting is not rivalrous as it doesn’t matter how many People look at it, you aren't ‘using it up’. a ahme is excludable ifyou can Prevent somebody from using it. If you need Gouge into the cinema then it's excludable. Street lighting is not excludable Ron't make thet body walking down the street at night benefits from it, you light shine on some users and not on others. Scanned sith CamSeamner(DSE) (vi) : Environmental Economics (Sem.-VI, 2016) . 397 . These concepts allow us to classify goods into certain categories; — Private goods are rivalrous and excludable, although sometimes the government provides publicly provided private goods (eg housing), — Open access common property is rivalrous and non-exeludable, an example ofthis would be fish in the ocean, it's difficult to stop people from coming in and fishing, but when they catch fish there will be leas for everybody else — Public goods are non-rivatrous, clean air is a public good, 80 i national defence or street lighting. Usually you will see the definition that Public good " grenon-rivalrous and non-excludable, but there are some public goods like cable “TV or club goods such as concerts and swimming pools that are non-rivalrous put it is feasible to exclude users, Some public goods are impure public goods -they are not directly rivalrous, but when too many people use them, congestion becomes a problem (roads would be a good example here). The congestion means that People are effectively excluded from them when the roads are blocked. A non-excludable public good is effectively a positive externality (or a public bad is a negative externality). If you clean up the environment then you can’t prevent other people from enjoying the cleaner environment - this is a non-excludable public good and a positive externality. Excluding anyone from consuming a public good would be inefficient. Classification: (i) Public bad (ii) Public good Gi) Public bad (iv) Public good Q. 4. (a) The Goodyear rubber factory produces output at costs C= 2Q%, where Q is the quantity of rubber produced in tons. In addition, 4 units of emissions are produced for each ton of rubber (Z=4Q). Marginal damage from pollution is $2 for each unit of emissions. The firm's output is sold in'a highly competitive market at a fixed price of $20 per ton. (@) In the absence of regulation, how much rubber would be produced by the factory? What is the firm’s profit? i) If the government decides to impose a Pigovian tax on pollution, what would be the amount of such a tax per unit of emissions? How many tons of rubber will Goodyear factory produce? How much does it pay in emission fees? What are its profits? (ii) A pollution control technology is invented that would reduce the firm's emissions to 2 units for each ton of output. How much would the firm be willing to pay for such a technology? (iv) How much the firm is willing to pay if there were no 8overnment regulation of pollution emissions? Thereby what hints can be drawn on the relationship between government regulation and demand for pollution control technology? Scanned sith CamSeamnerAMAR : B.A. Hons.) Economics III Year (Semester—V1) the Pigovian tax, the governmen, decides to offer a subsidy to ¢p, d. What is the efficient per unit he level of output and profit fo, 398 instead of (v) Now suppose that ins' ‘observes the outcome in part (i) and ‘batet firm for each unit of pollution al amount of such a subsidy? Calculate tl jodyear factory. . = rriae Tgaoro the relationship between E and Q for this part] 1,2,2,2,9 (b) Consider the following two situations of externalities () Your neighbor is burning leaves arid the smoke is blowing into your yard causing your asthma to flare up. (ii) Migration of workers into a country increases labor supply and lowers wages rate as a result of which income of native workers falls. Are the two types of externalities the same’ Which of them would result in inefficieny and why? Ans. (a) Cc = 2Q B= 4Q ? Explain your answer, $ 2lemission $ 20 per ton @ In absence of regulation, & = 20Q-2Q? dn = aq 7 2- 4Q=0 => Q* = 5units \ Firm's profit = 20x 5-2 (5)? 100-50 = $50 Gi) The amount of Pigouvian tax should be equal to marginal damage. Hence t =°2unit of emission : Hence MSC = MPA+t 4Q42 Hence 4Q+2 = 20 > 4Q = 18 > Qt = 4.5 units Emission fees = Emission amount x t = 4(4.5)x2 $36 * Profit = 20x 4.5 —2 (4.5)? - 36 . ! $13.5 Gai) NewE = 2Q Scanned ith CamScamner(SE) (vi) : Environmental Economics (Sem.-VI, 2016) 399 Profit with the invention = 20x 4.5 -2 (4.6)?—2 (4.5) x 2 = $31.56 So he would be willing to pay $ 18 per for such a technology. (iv) If there is no government regulation, he does not have to pay for the emissions caused. Hence this technology is not going to impact his profits at all and hence he would not be willing to pay anything. . This shows there is a positive relationship between government regulation and demand for pollution control technology. (v) The subsidy increase the mar WE, the subsidy should be equal to $ 2. The output woitld be same as in par (ii) ginal cost. Since marginal damage is § Q? = 4.5 units Profit, = 20 (4.5)~2 (4.5)? +(4x5-4%4.5)2 = $40.5 (b) No, the externalities are not the sam ) e. Although both are negative extermalities for the existing market in same se: nse. (i) This is a negative externality for which there would be no market. So unless the government intervenes, this would not be taken into account. This kind of externality leads to inefficiency. (i) This is also a negative externality for the existing workers. Although market takes into account this of externality and hence there would be no inefficiency because of this. Q. 5. (a) Suppose an individual's preference over environmental quality (q) and income to purchase market goods (M) can be represented by the utility function U = U(M,q) = (i) At income of Rs 10, what is the individual’s willin; (WTP) for an increase in q from q = 2 to q =4? Gi) What is the willingness to accept (WTA) in lieu of moving from q=2toq=4? (iiiy Compare the results of (i) and (ii). (iv) Ifucuny fanction is replaced by U (M, q)=M+q, interpret the impact on WTP and WTA? . 2,2,1,3 (b) Consider a pollution problem involving a paper mill located on river and a fishery operating on the same river. The fishery’ can Operate downstream (below the mill) or upstream (above the mill). Pollution lowers the profits of fishery; without pollution profits are Rs.8000 upstream and Rs. 5000 downstream; with pollution profits are Rs.2000 upstream and Rs. 1000 downstream; the mill earns Rs. 5000 as Profit. And the technology exists for it to build a treatment plant at the site that completely eliminates the pollution but at a cost of Rs.2000. There are two possible assignments of property rights; gness to pay Scanned ith CamSeamner400 AMAR : B.A. (Hons.) Economics III Year (Semester-VI) ee (a) the fishery has the right to clean air and (b) the mill has the right to pollute the river. (i) What is the efficient outcome (the maximum of total joint profit)? (ii) What are the ov regimes when there is no possibilit; (iii) How does your answere to bargain costessly? tcomes under two different property rights y of bargaining? (b) ckange when the two firms can 2,2,8 Ans. (a) Mt *[ 20) @ At point A, WTP for improvement in q = BC which is compensating surplus. BC = 10-5 =5 (i) AT point B, WTA for compensation for deterioration = DAV which is equivalent surplus DA = 20510 i = 10 (iii) Here we have WTA. as twice as WTP (ideally WTA and WTP should suproximatel be the same). This is because of the poor ‘substitutability between e two. : Gv) Scanned ith CamScaner(DSE) (vi) : Environmental Economics (Sem.-VI, 2016) 401 = 10-8 =2 Here WTA = WTP because we have perfect substitutability @ @ The joint profit - With pollution Without pollution Dpstream "2,000 + 5,000=7,000* 3,000 + 6,000 Downstream 1,000 + 5,000=6,000 5,000 + 5,000 — 2,000 = When upstream, joint profit is maximized when there is pollution. When downstream, joint profit is maximized without pollution. (ii) Outcomes with fishery having right to clean air. Fishery profit Mill’s profit doint profit Upstream 3,000 5,000 — 2,000 6,000 Downstream 5,000 5,000 — 2,000 8,000 Outcomes with will having rights to pollute the river Fishery profit Mill’s profit doint profit Upstream 2,000 5,000 . 7,000 Downstream 1,000 5,000 6,000 (iii) Without Baragaining, assigning of property rights may not lead to the efficient outcome. For example if fishery is assigned the property rights to dean air, efficient outcome is achieved only when the fishery operates the downstream, ‘ The coase theorem states that when conflicity property rights occur, bargaining between the parties involved will lead to an efficient outcome regardless of which party is ultimately awarded the property rights as long as transaction costs associated with bargaining are negligible. Q6. (a) In a market for similar but differentiated product such as housing, how would the producers with different costs reach optimal choice point? Each point on hedonic price function of air quality represents market equilibrium: Explain. Can the hedonic price line reflect the demand for air quality? 3,3,8 (b) What do you understand by sustainable development? Discuss the role of following in capturing the concept of sustainable development (i) Inclusive investment (i) Total factor productivity 6 __ Ans. (a) In the “real world” we are often confronted with bundles of goods with a single price for the whole bundle’ 7 of are interested in the price of an element of the bundle This is the focus the hedonic price theory ‘ By observing the prices of many houses with different characteristics, we Scanned ith CamSeanerAMAR : B.A. aS" 402 can infer the implicit value that is being placed on one characteristic, e.g. air quality , ; ges associated with many different occupations we can infer By observing wa! the value of sm: all:changes in e.g. risk Consider an homogenous area that can be col the point of view of, say, houses For simplification, each house is cha say, air pollution ‘ ‘We are interested in the relation between price and air quality, p =p (z) The price function is an equilibrium concept (partial equilibrium) resulting from interaction of supply and demand We assume that the market is perfe p(z) as given. = The consumer buys one house a¢ well as of + The consumer's problem is: nsidered a single market from racterised by a single characteristic, z, ct Both producers and consumers take ther goods x max U(x,2)8.t. x + plz) =¥ « What is the amount of x for particular values ofzto achieve a certain level of utility: G = Ue) \« The budget for buying the house, guaranteeing & certain level of utility is 0=y-x z + Alternatively, we can define the consumer's problem as u(y-6.9 = 6 + This is known as the bid function - it tells you the maximum amount ‘a consumer is willing to pay a8 2 function of income and air pollution Consumer choice : + Hedonic price function and two bid functions for two different levels of utility pie) yz) \oPert Ale quality 2 Scanned sith CamScamnersaat ee ee ee), 403 The producer * The costs c of Producing one house depend on input rice d t) characteristics 2; ¢ (r, 2) ne * The producer maximises profits N= 9-c(,2) + Alternatively the price to obtain a certain level of profit given a level of zis ; T= @-c(,26(7, 2,11) + This is known as the offer function - it tells you the minimum amount @ producer is willing to accept as a function of costs and air pollution Producer choice * Hedonte price function: ‘and two offer functions for two different levels of profit ‘Ai queity 2 Market equilibrium + In th ilibrium, the marginal bid, the marginal offer, and the house iitioe ars ‘dentical —ali parties in the market vafue the house the same, at the margin Ae qalty 2 Scanned ith CamScanerEconomics III Year Peme 404 AMAR : B.A. (Hon Willingness to P8Y san wre) wwe) Marginal implicit price function and marginal WTP for 7 ‘one more unit of z for consu-mers 1 and 2 ‘Ae gilty 2 ds of the” i is Jopment that meets the nee tainable development is devel s : sre eithout compromising the ability of Eire generations to meet their pean = needs. It contains within it two key concep ; . =“ the concept of needs, in particular the essential needs of the world’s poor, to which overriding priority should be givers and i « the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.’ owth and sustainable development (i) Investment for inclusive gr , Private investment can be an essential enabler of economic and human development: under the right conditions it creates jobs and boosts the activity of local firme, suppliers and distributors by creating demand and a market for their products and services. It can improve access to and the quality of infrastructure and services critical for the development of entrepreneurship and amall businesses, such as banking and finance. While most investment is undertaken by domestic firms, international investment can bring particular benefits, It can encourage innovation and spur productivity growth by bringing ‘in or generating new information and technologies - such as through knowledge- intensive activities like research and development. It can help to spread new technologies and expertise, for example through the creation of business linkages and by providing improved access to international markets and global value chains. If adequately framed, investment can improve the human resource base by. fuelling the development of skills in the host economy through educational and training programmes to meet market needs. Companies are alsoincreasingly driving the efforts to improve the sustainability of their operations and contribute to sustainable development. Responsible investors that respect international tandaris of responsible business conduct can help to identify and respond to a re a adyerte impacts associated with particular products, regions, sectors or scelnate e ere are many practical examples of the power of investment to tds Lave ciaanes development. In Southeast Asia private investment and speak fae en development, and the region’s record in export performance noone int leciés In ome cases, however, it has been less able to translate this policy frameworks am inclusive development, partly due to a lack of appropriate support sustainable development through investment Scanned ith CamScamnerand Anderson. (1993) ai should be valued at their marginal social Production on the agricultural natural 1 consequences that reflect changes in the q directly used in agriculture (¢.g., value of w this section, we note critical conceptual and defined, as a measure of sustainability, Conceptual issues. TF! after controlling for the wei rgue that non-marke esource base and environmental wantity or quality of resources not. ildlife habitat). In the remainder of Practical difficulties with TSFP, as P growth measures the r esidual growth in output ighted growth in input us e, where the weights are Producers maximize profits, output markets are comps technology is characterized by constant returns to se with respect to each input is equal to its share in to can be estimated using observed input and output -As noted earlier, TSFP modifies TFP by exp: include non-marketed inputs and outputs, and quantities with their ri this is correct dey etitive, and the production ale, the elasticity of output tal cost. Then, TFP growth quantities and prices. anding the input indices to weights the observed input ‘spective cost shares using social prices, Whether or not pends on the underlying behavioral assumptions and the nature of the production technology. If producers are profit-maximizers (or cost- r minimizers), non-market factors such as resource stocks which are beyond the control of the producer but which affect the production environment, should be treated asa technological constraint rather than as conventional inputs in TFP estimates (McFadden, 1978; Squires, 1992). The resulting growth residual should be explained by both technical change and resource stocks. Whether or inot resource quality is included in TFP calculations also depends on the nature of the production technology. If water quality, for example, is Scanned sith CamSeamnerov. ames Ve 406 AMAR ded, If it is a pure externality that uality for consumers), it gulatory costs may be joi i Id be inclu das a joint output, it shoul mode tect the system being evaluated (0.6. water qi ghould not enter the calculations although private re included as an input into production, Ifinstead, the behavioral rane vaate growth accounting, we need to planner who faces steal alae Oe eed non-market inputs would have been ey ie mee ‘nd then use these estimated input quantities in the MoE? input index, Observed input quantities (ci those VANGr profit “haximizetion or cost minimization) only reflect optima’ & 0. <0s Nake by producera who ignore externalities and face private, no’ , Prices for conventional inputs. . For the same reason, observed input and output choices should) ne va by private, rather than long-term economicor social, prices. The role valuation : in TFP measures is to measure the gradients of the technology (elasticities) at the observed producer output and input choices. However, in the absence of markets or in the presence of price distortions, the gradients will reflect only the producer's valuation, not society’s, of the products (Weaver, 1998). Therefore, valuing production at the societal shadow prices of goods, or by consumer prices rather than producer prices is conceptually flawed. For example, in the case of overexploitation of a joint access resource such as groundwater, where the cost of using the resource is negligible to the individual however large it might be for society or whatever the long-term implications for sustainability—the input should be valued at a negligible price in the input index. _ Insummary, in many instances, modifying TFP to a TSFP measure is likely. to be conceptually flawed. Alternative approaches need to be developed for considering social costs and benefits when assessing sustainability and designing interventions. derlying TSFP is that of a centra} Q. 7. (a) Do you think that uniform emission fees for firms that is based: on ambient pollution can result ininefficiency? Prove both mathematically and graphically (b) Short notes : (any two) @ Policy significance of Coase Theorem (iy Critical Account of Contingent Valuation Method (ii) Biocentrism vs Anthropocentrism , 8 Ans. (a) A uniform emission standard i ( is the one that is same across all the firms. Uniform standards require less information to implement. Uniform emission fees/taxes are i cost effective. S Lcd polluters, H and L and we have $ 200 kg as emission fees _ esate oe titecent fer two firms, a uniform emission taxes of $ 200i8 .g8 of emission i os fot standard to reduce 100 ews fom ae if we compare it with unfirm emission Scanned ith CamSeamner407 (SE) (vi) : Environmental Economics. (Sem.-VI, 2016) s MAG 200 ‘Emission fees 20 «80 120 Emissions (in kgs.) (b) @ Many economists have explained the significance of Coase theorems: 1. Institutional Base. S. Baker has pointed out many aspects of first Coase theorem which signify a new area of economics. According to him, the Coase theorem tells us that in a world with zero transaction costs and well defined property rights institutions neither foster nor prevent allocative efficiency. Ofcourse, the importance of this observation rests on the reverse conclusion that if transaction costs (information costs, bargaining costs, administrative costs etc.) dre significant as in the real world, institutions do matter. Hence, different institutions will have different impacts on efficiency and distribution, which, in turn, make comparative institutional analysis indispensable. 2. Need for Policy Measures. The Coase theorems signify that well defined and marketable property rights help in promoting economic efficiency. Further, the market mechanism can lead to a Pareto optimally despite the presence of externalities because it is possible to devise a private bargaining solution to remove the externalities. Today, there is general agreement that assigning property rights clearly may take care of some externality problems, particularly those concerning. environmental problems. They require more active government intervention. Some forms of this intervention might include regulatory measures, financial penalties, subsidization of corrective measures and creating a market for externality. 3. Interdepence of Economics on Law. According to J.Hirshleifer, given an assignment of proper rights and if there are no transaction costs, the final outcome will be efficient. It implies that in addition to removing artificial barriers to transaction costs, the law ought to assign well defined property rights. to all resources of economic value. Moreover, a free market would redistribute initial legal ownership rights in efficiency. It is only possible through judicial manner which would facilitate such transfers. 7 (i) The contingent valuation method (CVM) is used to estimate economic values for all kinds of ecosystem and environmental services. It can be used to estimate both use and non use values, and it is the most widely used method for estimating non-use values. It is also the most controversial of ‘the non-market “valuation methods. oN 3 The contingent valuation method involves directly asking people, in a survey, Scanned with CamScamnera AMAR : B.A. Hons.) Economics III Year (Se"_ste:-V1) - , syne ay for specific environmental services, ]; how much they would be ving rs dhe of Goiripehaation:they walla he some cases, people are asked for thi . tal services. It is call willing to necept to give up apecific environmental sertices, 1 is called “contingent” valuation, because people are aske: tos e heir wi penees to pay, contingent on a specific hypothetical scenario and description of the environmental service. 7 The contingent valuation method is referred to as a “stated preference” method, because it asks people to directly state their values, rather than inferring values from actual choices, as the “revealed preference” methods do. The fact that CV is based on what people say they would do, as opposed to what people are observed to do, is the source of its greatest strengths and its. greatest weaknesses. Contingent valuation is one of the only ways to assign dollar values to non- use values of the environment—values that do not involve market purchases and may not involve dir2ct participation. These values are sometimes referred to as “passive use” values, They include everything from the basic life support functions associated with ecosystem health or biodiversity, to the enjoyment of a scenic vista or a wilderness experience, to appreciating the option to fish or bird watch in the future, or the right to bequest those options to your | grandchildren. It also includes the value people place on simply knowing that’, giant pandas or whales exist. Gii) Anthropocentrism. literally meaning “human centered”—is the view that all environmental responsibility is derived from human interests alone. The traditional view of morality is that only human beings can be the focus of moral consideration—not rocks, rivers, plants, or even animals. Only humans are moral persons, have moral rights, and have a direct moral standing, We have a unique status among things on this planet, and morality only applies to us. Anthropocentrism assumes this traditional view that only human beings have a direct moral standing, and we therefore do not have any responsibility to the environment for its own sake. The value that we place in anything, such as. a house, a car, a pair of glasses, is based on the importance that these things have in our lives; there is nothing special about any of these things apart from the value we give them. Second, there is biocentric holism, sometimes called ecocentrism, which is the view that we have direct responsibilities to environmental collections, such as animal species and rain forests, but not necessarily to the individual organisms within those collections. What is important is'that ecosystems and species thrive. Even if theré is no negative human consequence of destroying a species or ecosystem, we still have a moral responsibility towards those collections in and of themselves. Biocentric holism was first articulated by American ecologist Aldo Leopold in his essay “The Land Ethic” (1949). He describes how notions of motality have evolved over the millennia, The earliest moral conception® regulated conduct between individuals, as reflected in the Ten Commandments. nen ‘eeulated conduct between an individual and society, as reflected in ; - But now, according to Leopold, we are on the brink of a new Scanned sith CamScanerWSE) (vi) : Envi ee : Environmental Economics (Sem.—VI, 2016) 409 VI, advance in morality that re environment. He calls this Bon aeeguoe nek between humans and the ethic simply enlarges the boundaries of the Ga ethic, and states that “The land plants, and animals, or collectively: the land” Thiet, to include soils, waters, how humans perceive themselves in relation “a is is involves a radical shift in saw ourselves as conquerors of the land. Now e environment. Originally we members of a community that also includes the Jai 1 Thee to, seaicnirael veaias oral principle of the land ethicis that“A thing i ind. Thus, he writes, the guiding the integrity, stability, and beauty of the bioti mr when it tends to preserve tends otherwise.” . iotic community. It is wrong when it wsdleoven aus eat orien asenciated with other environmental theories that are only part of a lar 8. The theory of deep ecology holds that humans 7 ‘ger ecosphere, and we should seek to understand how the environmental system operates as a whole. To gain that understanding, we need to go through a life-transforming experience called “re-earthing” by which we gradually identify more closely with the earth. Another related theory is the Gaia hypothesis, which is the view that the entire earth is a single ecosystem or organism that regulates itself through feedback mechanisms to maintain a state of equilibrium that is conducive to life on this planet. For example, when the heat from the sun increases or decreases, the planet's self-regulating ecosystem compensates by adjusting the amount of greenhouse gas that it emits; as a result, the temperature on-earth has remained relatively constant for the past billion years: Defenders of the Gaia hypothesis argue that recent human intrusion into the ecosystem threatens to disrupt its self-regulating process. Deep ecology and the Gaia hypothesis share the central intuition of biocentric holism that we must value the earth’s larger ecological system apart from our isolated human interests.~ 9090 Scanned sith CamSeamner