Exam 2020 Flashcards
You are given the following text from a textbook. Which heading would fit Best to describe the textbook passage?
“Consider two countries, X and Y. each country must choose whether or not to abate pollution. Pollution abatement is assumed to be a public good so that abatement by either country benefits both. Assume that each country maximizes its own net benefit, conditional on some expectation about how the other will act, and without collaboration taking place between the countries. We predict that the equilibrium solution consists of both countries not abating pollution. “
Prisoner’s dilemma game
True or false? The demand for a mineral is given by the function P = 90 – R, where P is the price and R the quantity of the mineral. The technical term for a resource price of 90 is “Limes price”.
False
An economy has two cement factories (CM1, CM2). The cement factories can reduce their annual CO2 emissions at different marginal costs. Fixed costs of the reduction are zero. The cement factories marginal costs (MC in CHF) of reducing CO2 by 50 tons, are given as follows: MC1 = 3x1 (CM1) and MC2 = 2x2 (CM2).
What tax rate is required to reach reduction targets at minimal costs?
What are the total costs TC of the reduction? The cost functions are C1 = 1.5*x12 and C2 = x22
Solution: t* = (60), TC = (1500)
Which of the following statements are according to the Hotelling rule true, which ones are false? A higher interest rate (r1 > r0) leads:
To a faster decline in demand
To an increase in the starting price p0 so that the resource inventory is completely dismantled
To slower increase of the resource price (decrease in the price path)
1st to have faster resource depletion and later to a slower resource depletion
To a faster decline in demand (f)
To an increase in the starting price p0 so that the resource inventory is completely dismantled (f)
To slower increase of the resource price (decrease in the price path) (f)
1st to have faster resource depletion and later to a slower resource depletion (t)
The EU Emissions trading system (EU ETS) it is an instrument of EU climate policy with the aim of reducing greenhouse gas emissions (such as CO2). The EU ETS currently includes and limits the carbon dioxide emissions in power generation and some sectors of industry such as cement factories of of around 11,000 plants in 31 European countries (28 au countries plus Liechtenstein , Iceland, and Norway
according to the theory about pollution control instruments, which of the following statements is true or false?
Since the price of admission certificates is traded on a market price fluctuation are not possible and therefore companies in the EU ETS have a great degree of planning security for investments.
The EU ETS is a cap and trade system which results in the abatement of a given level of pollution at the lowest costs.
In contrast to command and control instruments, companies belonging to the EU ETS have high incentive for innovation since certificate costs are a stimulus for further innovation.
Because of the high monitoring costs and the fact that the optimal level of CO2 emissions is 0 or close to 0 the EU ETS is advantages over any kind of command and control instruments.
since the price of admission certificates is traded on a market price fluctuation are not possible and therefore companies in the EU ETS have a great degree of planning security for investments. (f)
The EU ETS is a cap and trade system which results in the abatement of a given level of pollution at the lowest costs. (f)
in contrast to command and control instruments, companies belonging to the EU ETS have high incentive for innovation since certificate costs are a stimulus for further innovation. (t)
because of the high monitoring costs and the fact that the optimal level of CO2 emissions is 0 or close to 0 the EU ETS is advantages over any kind of command and control instruments. (f)
Is the following statement true? “Although India is the 4th largest CO2 emitting country in the world (in absolute terms , in gigatons), India’s per capita CO2 emissions are well below the global average.“
True
Suppose X denotes the amount of slices of cake eaten at Christmas . Which of the following utility functions fulfills the property of diminishing marginal utility for slices of cake?
X2
X0.25
x0.5
ln(x)
X2 (false)
X0.25 true
x0.5 true
ln(x) true
A mineral deposit has a size of 450 megatons and is depleted in two periods, the demand for the mineral is given by the function P = 450 – R, where P is the price and or the quantity of the mineral.
Assume now that the discount rate is 0.
In an optimum, how many megatons are extracted in the first period?
And how many megatons are then extracted in the second period?
Response: R1 = 450 - R2 = 225 megatons
Response: R2 = 450 / (2 + discount factor) = 225 megatons
A mineral deposit has a size of 450 megatons and is depleted in two periods, the demand for the mineral is given by the function P = 450 – R, where P is the price and or the quantity of the mineral.
Assume now that the discount rate is 25%.
In an optimum, how many megatons are extracted in the first period?
And how many megatons are then extracted in the second period?
Response: 250 megatons
Response: 200 megatons
A mineral deposit has a size of 450 megatons and is depleted in two periods, the demand for the mineral is given by the function P = 450 – R, where P is the price and or the quantity of the mineral.
Assume now that the discount rate is 50%.
In an optimum, how many megatons are extracted in the first period?
And how many megatons are then extracted in the second period?
Response: 270 megatons
Response: 180 megatons
A mineral deposit has a size of 450 megatons and is depleted in two periods, the demand for the mineral is given by the function P = 450 – R, where P is the price and or the quantity of the mineral.
Assume now that the discount rate is 100%.
In an optimum, how many megatons are extracted in the first period?
And how many megatons are then extracted in the second period?
Step 1: Determine Prices in Each Period
R1+2R2=450.
Step 2: Solve for 𝑅1and 𝑅2
Total resource constraint
Hoteling Condition
Which of the following statements about the cost effectiveness of policy instruments is true, which is false?
Cost-efficiency means that the required avoidance is distributed among the companies in such a way that total avoidance costs are the same.
Cost efficiency avoids that the avoidance goal is achieved at the lowest possible economic costs.
Adjusting the avoidance of the companies leads to a reduction in the overall economic costs as long as the marginal avoidance costs of the companies are different.
Adjusting the avoidance of the companies leads to a reduction in the overall marginal costs as long as the total avoidance costs of the companies are different.
When marginal avoidance costs are the same in all companies cost reduction through further redistribution of avoidance is no longer possible.
Cost-efficient avoidance is achieved when the marginal avoidance costs of all companies are the same.
Cost-efficient avoidance is achieved when the marginal costs of all companies are the same.
Cost-efficiency means that the required avoidance is distributed among the companies in such a way that total avoidance costs are the same. (f)
(Cost-efficiency does not require total avoidance costs to be the same for all companies. It requires that marginal avoidance costs (MAC) are equal across companies, as this minimizes total costs.)
Cost efficiency avoids that the avoidance goal is achieved at the lowest possible economic costs.
False: Cost efficiency ensures that the avoidance goal is achieved at the lowest possible economic costs by equalizing marginal avoidance costs across companies.
Adjusting the avoidance of the companies leads to a reduction in the overall economic costs as long as the marginal avoidance costs of the companies are different.
True: When marginal avoidance costs differ between companies, redistributing the avoidance effort reduces total costs by shifting reductions from higher-cost companies to lower-cost companies.
Adjusting the avoidance of the companies leads to a reduction in the overall marginal costs as long as the total avoidance costs of the companies are different.
False: Adjusting avoidance efforts affects total economic costs but does not necessarily reduce marginal costs. The key condition for cost efficiency is that marginal costs (not total costs) are equalized.
When marginal avoidance costs are the same in all companies cost reduction through further redistribution of avoidance is no longer possible.
True: Once marginal avoidance costs are equal across companies, no further redistribution can lower overall costs. This is the condition for cost efficiency.
Cost-efficient avoidance is achieved when the marginal avoidance costs of all companies are the same.
True: Cost efficiency requires that marginal avoidance costs (MAC) are equalized across companies.
Cost-efficient avoidance is achieved when the marginal costs of all companies are the same.
False: Cost-efficient avoidance is achieved when marginal avoidance costs (not total marginal costs, which include other factors) are the same across companies.
An economy has two cement factories (CM1, CM2). The cement factories can reduce their annual CO2 emissions at different marginal costs. Fixed costs of the reduction are zero. The cement factories marginal costs (MC in CHF) of reducing CO2 by X tones are given by MC1 = 9x1 (for CM1) and MC2 = 3x2 (for CM2). The government would like to reduce the annual CO2 emissions of the two factories by 40 tons in total by means of tradeable permits. The annual emissions before any governmental regulation (E in tons) are E1 = 40 (for CM1) and E2 = 40 (for CM2). Each of the two cement factories receives the same number of permits. Each permit entitles the owner to emit one ton of CO2. After the initial allocation, the power stations are allowed to trade their permits on the permit market.
How many permits are issued in total if the target reduction is 40 tons?
How many permits does each cement factory buy or sell in a cost efficient equilibrium (= the reduction target is reached at minimal costs)?
Solution:
Amount of total permits issued = total emissions - reduction = (40 + 40) - 40 = 40
Marginal cost of CM1 is 3 times the one of CM2 → It should reduce its emissions by 3 times less → -10 (CM1) - 30 (CM2) = -40
CM1 initially has 20 certificates (half of 40) and emit 40 - 10 = 30 tons → It need to buy 10 certificates
CM2 initially has 20 certificates (half of 40) and emit 40 - 30 = 10 tons → It need to sell 10 certificates
Consider the global climate problem. Assume that it is costly for all states to abate emissions. Assume also that if a state abates emissions, all states will benefit from the reduced emissions. Eventually, if all states abate emissions, each state would be better off than in the status quo. Given your knowledge of prisoners dilemma from the lecture, which of the following statements are true, which ones are false ?
The strategy “abatement “ is a dominant strategy for some states , the strategy “no abatement “ is a dominant strategy for others.
There is no dominant strategy for any state.
In the static equilibrium, the “abatement” strategy is a dominant strategy for all states.
The dominant strategy is not pareto-efficient.
The strategy “abatement “ is a dominant strategy for some states , the strategy “no abatement “ is a dominant strategy for others.
False:
In the Prisoner’s Dilemma framework applied to the climate problem, “no abatement” is the dominant strategy for all states. Each state individually has an incentive to free-ride on the abatement efforts of others to avoid costs while still benefiting from reduced emissions. Thus, abatement is not a dominant strategy for any state.
There is no dominant strategy for any state.
False:
There is a dominant strategy in this scenario: “no abatement”. Each state individually prefers not to abate because it minimizes their own costs, regardless of the actions of others.
In the static equilibrium, the “abatement” strategy is a dominant strategy for all states.
False:
In the static equilibrium (Nash equilibrium), all states choose “no abatement” because it is the dominant strategy for each. “Abatement” is not a dominant strategy, as each state can reduce costs by choosing “no abatement” while hoping others abate.
The dominant strategy is not pareto-efficient.
True:
The dominant strategy (“no abatement”) leads to a Nash equilibrium where no state abates. This outcome is not Pareto-efficient because all states would be better off if they collectively chose “abatement.” A Pareto-efficient outcome requires cooperation, which is not achieved in the standard Prisoner’s Dilemma framework without external mechanisms or agreements.
You are given the following text from a textbook. Which heading would fit best to describe the textbook passage?
“Consider an agricultural community. Suppose that each Shepherd, acting in her own self-interest , allows her flock to graze in the common field. When everyone acts in her apparent self-interest, harmful overconsumption occurs, which means that all the grass is eaten, to the detriment of everyone.”
Tragedy of the Commons
Race to the bottom
Tale of externalities
Resource war
Detrimental competition
Tragedy of the Commons
The passage describes a situation where individuals, acting in their own self-interest, deplete a shared resource (the common field), leading to collective harm. This is the core concept of the “Tragedy of the Commons,” where the lack of property rights or regulation over a shared resource results in overuse and eventual degradation.
Which of the following statements about the international climate policy are true, which ones are wrong ?
Cooperation is difficult to establish between conflictual regimes but thanks to the Paris agreement 2015 there is an authority which imposes taxes and transfers own sovereign countries
Race to the bottom means that environmental standards decline to the level of the country with the lowest standard.
International externalities are the unintended and uncompensated byproduct of one countries consumption or production on another country’s welfare.
International climate agreements are difficult to implement because individual countries have incentives for what economists call free riding
Cooperation is difficult to establish between conflictual regimes but thanks to the Paris agreement 2015 there is an authority which imposes taxes and transfers own sovereign countries
False:
The Paris Agreement (2015) does not establish an authority to impose taxes or transfers on sovereign countries. Instead, it is a voluntary framework where countries submit Nationally Determined Contributions (NDCs) to reduce emissions. The agreement relies on transparency and peer pressure to encourage compliance rather than enforcing penalties or imposing taxes.
Race to the bottom means that environmental standards decline to the level of the country with the lowest standard.
True:
This is an accurate description of the race to the bottom phenomenon. It occurs when countries compete to attract businesses by lowering environmental standards, leading to a downward spiral where standards converge to the lowest level.
International externalities are the unintended and uncompensated byproduct of one countries consumption or production on another country’s welfare.
True:
This is a correct definition of international externalities. For example, greenhouse gas emissions in one country contribute to global warming, which affects the welfare of other countries, often without compensation.
International climate agreements are difficult to implement because individual countries have incentives for what economists call free riding.
True:
This is a well-known issue in international climate policy. Since the benefits of emission reductions are shared globally, individual countries have an incentive to “free ride” on the efforts of others while avoiding the costs of abatement themselves.
Which of the following statements about the Hotelling rule is true, which one is false ?
The discovery of new resource deposits changes the slope of the price path
The discovery of new resource deposits leads to an increase in the slope of the demand curve
A backstop resource is available in infinite quantities at constant total costs. One example of a potential backstop resource in the energy sector is nuclear fusion.
Empirical evidence shows that the prices of non-renewable resources did not always develop according to the Hotelling rule.
“The discovery of new resource deposits changes the slope of the price path.”
True:
The discovery of new resource deposits effectively increases the total available resource stock, which can alter the optimal extraction rate over time. This changes the slope of the price path because the marginal cost of extraction and the scarcity rent are affected.
“The discovery of new resource deposits leads to an increase in the slope of the demand curve.”
False:
The slope of the demand curve is determined by consumers’ willingness to pay and their price sensitivity, not by the discovery of new resource deposits. Instead, the discovery affects the supply curve by increasing the available resource stock, which may influence prices indirectly but does not affect the demand curve itself.
- “A backstop resource is available in infinite quantities at constant total costs. One example of a potential backstop resource in the energy sector is nuclear fusion.”
True:
A backstop resource refers to a substitute that is available in essentially unlimited quantities at constant costs and can replace non-renewable resources once their prices rise too high. Nuclear fusion is often cited as a potential backstop resource in the energy sector due to its theoretically limitless fuel supply and potential for constant costs, though it is not yet commercially viable.
- “Empirical evidence shows that the prices of non-renewable resources did not always develop according to the Hotelling rule.”
True:
Empirical evidence has shown deviations from the Hotelling rule in the real world. Factors like technological advancements, market imperfections, policy interventions, and the discovery of new resources have led to resource price paths that do not always follow the theoretically predicted pattern.
If a country follows the Hartwick rule, it means that…
It has invested the revenues of its non-renewable resources in long-term capital instead of consuming them
It has Invested in long-term capital instead of extracting its renewable resources
it has invested the revenues of its renewable resources in long term capital instead of consuming them
It has invested the revenues of its non-renewable resources in long-term capital instead of consuming them
Two fisherwomen live by a Lake. In order to guarantee the long-term survival of the fish stocks, a reduction in catch quotas is necessary. On the one hand, this reduction is associated with opportunity costs due to lost income. On the other hand, it creates a long-term benefit for both fisherwomen. Both fisherwomen can choose between two different strategies:
reduction of the catch quota (REDUCTION): for the fisherwoman who reduces her quota, there are costs of 100. The benefits of each fisherwoman’s reduced effort of 70 for both fisherwomen (i.e. if both produce, each has a benefit of 140; if one reduces efforts each has a benefit of 70).
maintaining the previous quota (NO REDUCTION): there are no costs but also no benefits.
Fill out the payoff matrix
PAYOFF Matrix No reduction Reduction
No reduction ? ; ? ? ; ?
Reduction ? ; ? ? ; ?
PAYOFF Matrix No reduction Reduction
No reduction 0 ; 0 70 ; -30
Reduction -30 ; 70 40 ; 40
A beekeeper and the fruit grower are neighbors. This has the advantage for the fruit grower that the bees pollinate his trees. A beehive pollinates one hectare of its orchards. Now there are not enough beehives to pollinate the entire plantation . Pollination costs without bees €40 per hectare. The beekeeper has a total beekeeping cost of H^2 + 10H + 10, where H is the number of beehives. Each beehive provides €80 of honey.
How many beehives does the beekeeper keep if he calculates independently of the fruit grower?
What is the socially optimal number of beehives?
How many beehives does the beekeeper keep if he calculates independently of the fruit grower?
Solution: H : (80H - (H^2 + 10H + 10))’ = 0 ⇔ H = 35
What is the socially optimal number of beehives?
Solution: H : (80H + 40H - (H^2 + 10H + 10))’ = 0 ⇔ H = 55
Suppose that the total damage D and the total benefit B functions are given as follows: D = 0.5 * C^2 ; B = 100*ln(C)
What is the efficient level of pollution C*?
What is the shadow price u* at the efficient level of pollution?
What are the maximized total benefits NB*? Hint: you can assume that ln(10) = 2.3
What is the efficient level of pollution C?
Solution: C = 10
derivate B and D after dC and set them equal → solve for C*
C = 100/C ⇔ C^2 = 100 ⇔ C* = 10
What is the shadow price u* at the efficient level of pollution?
Solution: u* = 10
insert C* in dB/dC or in dD/dC → result = u*
What are the maximized total benefits NB? Hint: you can assume that ln(10) = 2.3
Solution: NB = B(C) – D(C) = 230 - 50 = 180
