ENRM 1001 2021/2022 Semester 1

Assignment 4

Released:24 November 2021, 5:00 p.m.

Due: 25 November 2021,5:00 p.m. via online Turnitin submission portal

Late submission: Via Late Portal – 20% penalty, unless excused, up to 25th November, 11:59 p.m. No
further submissions accepted thereafter.

(50 marks total)

1) Consider the case of a firm producing paper, a process which involves emitting sulphur into the
air. This pollution imposes damage costs on people internationally, but they are not
compensated for these harms. Assume the following relationships in the paper market (P is price
and q is quantity of paper):

Market demand: P = 1500 – 0.1q

Private-cost supply: P = 100 + 0.1q
Marginal external cost: e=200

a) Calculate the “free market” equilibrium price P and quantity q. (2 marks)

b) Calculate the “socially optimal” equilibrium price and quantity. (3 marks)
c) Draw a fully labelled graph illustrating the market demand curve, the private
cost supply curve, the social cost supply curve, the private (“free market”)
equilibrium and the socially optimal equilibrium for the
output quantity of paper. (5 marks)

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2) Consider the table below, illustrating two sources (source A and B) of a particular type of
emissions to the air, and their Marginal Abatement Costs (MAC).

a) Draw a separate fully labeled graph for each firm’s MAC curve. (4 marks)
b) Use your graphs from a) to show what the emissions will be for each source and
in total for both sources combined if an emissions tax equal to the marginal
external cost of $10000/ton is imposed? (4 marks)
c) How can you tell that the emission reduction has been distributed between the
two sources in accordance with the equimarginal principle, and what does
this mean? (2 marks)

3) In your own words, explain from an economic perspective some of the main
characteristics of the climate problem and why it is difficult to reach an effective
international climate agreement. Outline how economists often propose to reduce
global greenhouse gas emissions in an efficient way. (10 marks)

4) Using your own words and examples, explain weak sustainability and strong
sustainability, respectively, including the difference between the two concepts. (10 Marks)

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5) Income inequality is a challenge to empowerment for many groups. Use an
example and a fully labeled graph to explain how the income distribution in
a population can be illustrated. State what such a graph is called.
Use your graph to explain how a measure of income inequality can be
calculated and interpreted, and what such a measure is called. (10 marks)

End of Assignment