Question One (30 marks)
a) Comment briefly on the following statement: “Given that pollution is harmful, only a zero level of pollution is desirable.” (3 marks)
b) Consider a pollution problem involving a beer factory located on a river and a community whch uses the polluted water. The marginal damage (MD)/cost to the society is given by the function: MD = 20 + 0.1X
Where X is the amount of pollution. Suppose the firm’s marginal benefit (MB) from the pollution is:-
MB = 100 – 0.1X
i. Graph the marginal benefit and the marginal damage curves with pollution on the horizontal axis. (2 marks)
ii. How much will the beer factory pollute in the absence of any regulation or bargaining? (2 marks)
iii. What is the efficient level of pollution? (2 marks)
c) Explain why the traditional indicators of welfare (GDP and GNP) are inadequate as measures of sustainable development. (8 marks)
d) Discuss how the following demographic factors affect the environment. (6 marks)
i. Population size
ii. Population distribution
iii. Population composition
e) Assume that the demand curve for an environmental god is fully coincidental with the marginal social benefit function and can be described as:-
MSB = MPB = 12 – 3q
Where q refers to the quantity of the good.
Assume that the marginal private cost function can be described by MPC = q, and that the marginal social costs are always triple the marginal private costs.
i. Determine an equation for the marginal social costs (MSC) (1 mark)
ii. Graph the functions (1 mark) and algebraically determine:-
1) The competitive market level of output and price. (2 mark)
2) The optimal/efficient level of output and price from society’s point of view. (2 marks)
iii. What is the dead weight loss from these social costs?
