Positive and Normative Model of Climate Change.
1. Figure 2.1 below shows the trends in total global emissions for the period 1970-2016, according to
the Emissions Gap Report 2017, A UN Environment Synthesis Report. Trends in global greenhouse
gas emissions are illustrated in Figure 2.1a, while Figure 2.1b shows the development in global
carbon dioxide (CO2) emissions from fossil fuel combustion, cement production and other
processes. Please answer the following questions:
a. A very simple normative model of the climate would involve greenhouse gas
accumulation and a temperature change. One of the claims is that we are experiencing
global warming because of higher greenhouse gasses, according to panel 2.1.a describe the
trends in total global emissions for the period 1970-2016. Mention what is the major source
for total global greenhouse gas emissions.
b. In the context of relative stable economic growth, Is there a slow-down in growth of global
CO2 emissions? Use Panel 2.1.b to answer this question.
If cement production and fossil fuel use are good proxies for economic growth, according
to the figure below, does economic growth inevitably lead to environmental degradation?
Figure 2.1.a: Global greenhouse gas emissions for top six emitting
Figure 2.1.b: Global carbon dioxide emissions per region from
countries and regions (excluding land use, land-use change and
fossil fuel use, cement production and other processes, and from
forestry), international transport emissions, and land use, land-
use change and forestry emissions.
Global greenhouse gas emissions
Global CO2 emissions
Land-use change emissions (net CO2)
Other G20 countries
Land-use change fires (CH4, N2O)
Note: Other G20 countries include Argentina, Australia, Brazil, Canada, Indonesia, Mexico, Republic of Korea, Saudi Arabia, South Africa and Turkey. The greenhouse
2. Put together a dataset of Gross Domestic Product (GDP) in different geographical units (e.g.
Countries) for each year. Locate data on the average annual temperature at a typical location in
each geographical unit (e.g. Country's Capital) for the same years. For each geographical unit, you
should have two numbers: GDP and average annual temperature. Try to get at least information
on 30 geographical units. Answer the following questions:
Plot these data (GDP on one axis, temperature on the other).
b. Is there a relationship between these two measures? Support your answer by computing
the statistical correlation between GDP and Annual temperature.
Instead of looking at annual average temperature, look at changes in temperature from
one year to the next. What do you conclude about this analysis. Has the temperature been
d. Are there any additional variables that might increase the explanatory power of your data?
Economics and the Environment
3. The relationship between economic activity and the natural environment is illustrated by the
materials balance model. Answer the following questions:
State how increased use of pollution prevention technologies affect the materials balance
b. Assume that stringent pollution controls are place on the flow of residuals released into
the atmosphere. According to the materials balance model, what does this imply about the
residual flows of inputs into the economy?
Understanding Environmental Damage
Using the data in the Table below, graphically illustrate the relationship between a country's GDP
per capita and its per capita municipal waste generation.
Municipal waste was collected from OECD website. It is defined as waste
collected and treated by or for municipalities. It covers waste from households,
including bulky waste, similar waste from commerce and trade, office buildings,
institutions and small businesses, as well as yard and garden waste, street
sweepings, the contents of litter containers, and market cleansing waste if
managed as household waste. The definition excludes waste from municipal
sewage networks and treatment, as well as, waste from construction and
demolition activities. This indicator is measured in thousand tonnes and in
kilograms per capita.
Nominal GDP for 2013 and 2014. World Development Indicators, The World
Bank. GDP at purchaser's prices is the sum of gross value added by all resident
producers in the economy plus any product taxes and minus any subsidies not
included in the value of the products. It is calculated without making deductions
for depreciation of fabricated assets or for depletion and degradation of natural
resources. Data are in current U.S. dollars.
What conclusion can you draw from your analysis?
How would you define Municipal Waste according to the sources of environmental
damage and the scope of Environmental Damage? Explain your answer.
Modeling the Market Approach: Private Goods
5. Suppose the market for organically grown wheat is modeled through the following functions:
P = 10 + 0.5Qs and P = 22 - 2.5Qd, where Qs and Qd are in millions of bushels, and P is price
a. Find the market equilibrium price and quantity.
b. Determine the value of producer surplus and consumer surplus.
Modeling the Market Approach: Public Goods
6. Assume two neighbors who live next to a pond. Both neighbors get together to determine how
each of them value a large deck overseeing the pond. After some economic analysis, they arrive
to the following demand estimates:
Qa = 160 - 20Pa
Qb = 60 - 5Pb
where Q is the size of the deck to be built and P is the price for inputs and labor.
a. Based on these estimates, determine the market demand (assuming these are the only
two households living next to the pond) for this public good, the deck overlooking the
If the market supply for pond decks were P = 6 + 0.15Q, what would be the optimal
provision of this public good?
Which neighbor is more likely to build the pond? Explain your answer.
Modeling the Market Approach: Externalities
7. Consider the case of a positive consumption externality. Suppose throughout this exercise that
demand and supply curves are linear, that demand curves are equal to marginal willingness to pay
curves and that the additional social benefit from each consumption unit is k and is constant as
consumption increases. Demand and supply are given by:
Xd = a Xs + B
The Social Marginal Benefit curve is given by:
a. Derive the competitive equilibrium price and output level.
b. What is the optimal output level?
Consider the following scenario represented below.
a. Calculate the CS, PS, the externality cost, and overall surplus in the absence of the tax. Then
calculate these again under the tax, taking into account the tax revenue raised. Calculating
the various triangles, we get the results as outlines in the table below. When calculating
the external costs, it is easiest to simply subtract the area under the supply curve from the
area under the SMC curve.)
b. What is the DWL from not having the Piguvian tax?
Efficient Pigouvian Tax
Modeling the Market Approach: Property Rights
9. Your task is to propose a policy initiative to reduce urban runoff, using the assignment of property
rights according to the Coase Theorem. Assume that the major polluters are parking lots and the
major party affected are recreational parks around the city. Describe your proposal in detail. Make
sure to include the following:
a. Who should be assigned property rights?
b. How these rights are to be defined and distributed?
c. How should a price be determined?
10. The reason people end up in court is that they are confused about who has "what property
rights" and this ambiguity is making difficult for they to come up with the optimal solution to the
problem on their own. True or False: While it might not matter for efficiency, which way the
judge rules, the parties care about the outcome of his ruling.
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