Environmental Economics and Public Policy

1.  True, False, or Uncertain and explain (3*2’=6’)

( 1) Decreasing pollution is associated with social welfare improvement.

(2) According to the Coase Theorem, how we distribute tradable permits initially will not matter for the final costs and pollution levels of each firm.

2.   Please describe the Regression Discontinuity Design (RDD) method, and name one scenario where you can apply this method. (4’)

3.  A builder proposes a skyscraper that would block sunlight to the neighboring houses. The building would have net benefits to the builder of $500,000. The neighbors, who use some solar heating, would face reduced property values and increased heating costs totaling $200,000.

( 1) The law clearly stipulates that the neighbors have the right to solar access. Is a Pareto-improving exchange possible? What do you expect the outcome to be? ( 1’)

(2) What do you expect the outcome to be if the builder had the right to construct the skyscraper, even if it blocked solar access? ( 1’)

(3) Suppose again that the neighbors have the rights. Because there is a large number ofneighbors, hiring an attorney to negotiate with all of them will be expensive, perhaps as much as $125,000. Is a Pareto-improving exchange possible? What do you expect the outcome to be? ( 1’)

(4) Suppose it would cost $325,000 to hire an attorney. Does this affect your answer to part (3)? Explain why. ( 1’)

4.  The government asks you to estimate the impact of air pollution on public health in Singapore for policy design. The data provided include daily mortality and air pollution levels from monitoring stations. Please describe the potential issues for causal inference and  try  to propose some ideas/methods to address them. (6’)

5.   How does subsidy affect welfare in a perfectly competitive market? You may use the figure on Slide 36 of Lecture 2 (market and regulation) to show the welfare with and without subsidy and the differences, if any. (4’)

6.  Market supply in a competitive industry is P  = Q. Demand is P = 200 − Q. Production emits pollution with an external cost of $50 per unit of output. In response to environmentalists, the government creates a pollution tax of$100 per unit. Is overall welfare improved or reduced by the pollution tax? Please estimate the welfare before and after the tax (use figures if necessary). (2’+2’+2’=6’)