# Econ3335 (2014) Assignment 2: The Pigouvian Framework

Econ3335 (2014) Assignment 2: The Pigouvian Framework

```someone can help my environment economic assignment?! just one question.
only the problem 1.
i just finish the problem1 (a) (b) (c) but im not sure . so i also want check it is all correct answers or not.
my real question is (d)

(a) 0.0012734 because 42/32981.1 = 0.0012734
(b) 0.0012734 same answer as (a) coz each unit of GDP is 1\$ so same value.
(c)0.254691 = 0.0012734*200

is this all correct answers? if yes what is (d)?Problem 1:

In the year 2000, the Gross World Product (GWP)1 was equal to 32,981.1 bill \$US (in current \$,
that is in year 2000 units of purchasing power.
Global greenhouse gas emissions (GHGs), EGHG(2000), were 42 Gigatonnes (billion tonnes) of
carbon dioxide equivalents (CO2e). A CO2e lets us put other GHGs such as methane, nitrous
oxide and F-gases into mass units of the amount of CO2 that would cause the same amount of
warming. This allows us to add up GHGs in terms of CO2e.
a) The GHG intensity of the GWP (IGHG) is the amount of GHGs that are produced as residual
byproducts for each unit of GWP. Find the GHG intensity of the world GDP in the year 2000.
b) Let each unit of GDP be equal to 1 \$ worth of goods and services, which we will call a “real
basket”. How many GHGs measured in tonnes of CO2e are emitted for each basket? (i.e. find
the GHG intensity of real baskets of GDP)
c) Assume that economists have estimated that the damages caused by each tonne of CO2e in the
year 2000 are equal to \$2002. That is also called the social cost of carbon and is equal to the
carbon price such that PC = \$200/t CO2e.3 Multiply the carbon price by the GHG intensity of a
real basket to get the GHG component of the marginal external cost of each basket-worth of
GWP.
Note that the marginal cost for CO2 is a constant over a short time frame such as one year. This
is because CO2 is a “cumulative pollutant”, which means that it builds up since each molecule
remains in the atmosphere for something like 100 years on average before being reabsorbed into
the oceans (by diffusion) or by plants via photosynthesis.
d) GHGs are only one category of externalities from human production. Other environmental
externalities include global pollutants like ozone depleting CFCs and local and regional air
pollutants like SO2 and NOx, O3, Hg (mercury) and fine particulates (soot) and toxic substances
1

The GWP is analogous to the Gross Domestic Product (GDP) and also the Gross National Product (GNP) but for
the world as opposed to individual countries.
2
They do this using methods of social cost benefit analysis (Ch. 6 – 8).
3
This carbon price is higher than most estimates for this time period but is still with the feasible range. I am using
the high price as this will make the graph in the next question easier to draw. Note that carbon prices vary over time
and that we easily get this sort of price over the 20th century using climate economy models with utilitarian
discounting.
like dioxins. There are also non-environmental externalities such as when people get educated
and others benefit. Assume that the non-GHG externalities of the GWP are on net negative and
are equal to MCExtNon-GHG = Q, where Q is the number of real baskets. Add this to the marginal
cost external of the GHG component (MCExtGHG) to get the marginal cost external as a function
of the total number of baskets (Q). Write down an equation for the marginal cost external for a

Problem 2:
Suppose that in the year 2000, the global demand for baskets was: QD(P) = 83-50P
And, the global supply of baskets was: QS(P) = 50P - 17
The net marginal cost external of producing baskets was:
MCExternal_net = 0.25 + Q/100
Quantity units are in trillions of “real baskets” where a real basket has a value of \$ US in year
Benefit and cost units are in \$US/baskets where dollars are in terms of year 2000 purchasing
power.
a) Find the inverse demand for baskets and use this to find the consumers’ marginal benefit of
baskets and call this the marginal benefit private. Note this is also the consumers’ maximum
marginal willingness to pay (MWTP) for baskets. Find the inverse supply for baskets and use
this to find the producers’ marginal cost of baskets and call this the marginal private cost of
baskets. Note this is also the producer’s minimum marginal willingness to accept (MWTA) for
selling baskets. Plot these on a graph using graph paper. Find the market quantity and the
market price and label on your graph. Compare these with the value of the GWP and the price
of a basket in question 1.
b) Add the marginal private cost to the net marginal external cost to get the net marginal
cost social and plot both the marginal net external costs and marginal net social costs curves on
the graph. Be sure to label carefully.
c) Use algebra to calculate the socially efficient quantity of baskets (i.e. the socially efficient
real GWP) and price. Label on your graph. Compare the market price and quantity with the
socially efficient price and quantity.
d) At the socially efficient allocation, (QSE) use letters to label the following:
i) \$ total private benefits to consumers (total WTP)
ii) \$ net total external costs.
iii) \$ total private costs to producers (total WTA)
iv) \$ total private surplus
v) \$ net total social costs.
vi) \$ total social surplus.
* You do NOT need to calculate here, just use the letters.
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