HW # 2 Chapter 2

Question 1 Distinguish among private efficiency, social efficiency, social welfare, and sustainability. Nuclear plants in the U.S. store used uranium fuel and radioactive wastes outside the plant, most often in steel-lined concrete pools. Evaluate this practice according to each of the four criteria. Private efficiency: Parties directly involved gain from the exchange of goods and services. Social efficiency: Society gains, including parties directly affected as well as all other parties. Social welfare: Includes equity considerations as well as (social)efficiency. Sustainability: Requires us to make choices that allow future generations to have the potential to be at least as well off as we are today.

Question 1 (continued) Storing nuclear waste outside the plant maybe the lowest-cost method, allowing us to have the lowest-cost electricity. So it could be privately efficient. It would probably be more socially efficient to have a permanent centralized site to store the wastes, helping to insure that the wastes could be more easily monitored for the safety of society. From a social welfare standpoint, it does seem equitable that we bear the waste for the energy we use. Nevada protested the Yucca Mountain centralized site, where they get all the waste. The current system of storing waste outside the plant violates sustainability. Future gens are left with more of the waste, and less of the uranium.

Question 2 Distinguish between weak and strong sustainability. Give an energy-related example for each. Which version of sustainability to economists use, and why? Strong sustainability requires that we leave specific resources for the next generation. Weak sustainability requires us to leave them the same capacity as we have, but does not specify the form of the resources. Weak sustainability: Norway using the receipts from its North Sea oil sales towards a pension plan for seniors. Strong sustainability: using renewable fuels leaves just as much of those fuels for the future. Economists use weak sustainability, as it allows greater growth and higher social efficiency.

Question 3 Provide three energy-related examples of market failures: one for monopoly, one for externalities, and one for public goods. Monopoly: OPEC (1970s especially), Enron (California 2000) Externalities: Injecting water during fracking and possibly other oil and natural gas drilling seems to have caused a magnitude 5.6 earthquake in Oklahoma. Public goods: Research and development of nuclear fusion, climate change agreement.

Question 4 In its renewable portfolio standard, North Carolina requires Duke Energy Company to use a small amount of hog and chicken waste that other companies convert into natural gas. Why do you think the state has this requirement? We are one of the top states in hog and swine production. Those industries have strong lobbies and profit from selling the waste to Duke Energy. It is a very high cost source of alternative energy at the current time.

Question 5 Explain the logic behind OPEC’s decision to reduce oil supplies. What impact does this decision have on the market outcome? Is this result efficient from a social welfare perspective? Why or why not? OPEC is trying to reduce oil supply to raise the price and make higher profit. Price is higher and quantity of oil lower as a result of their actions. The result is inefficient from a social welfare perspective as the global loss in well-being due to higher prices (loss in consumer surplus) exceeds the gain to the OPEC countries (producer surplus).

Question 6 For many years, electric utilities were regulated as natural monopolies. Why was the electric utility industry considered to be a natural monopoly? In states that are restructuring their electricity industry to allow competition, what has changed that allows us to consider deregulation? Bigger was more efficient. Economies of scale (Declining LRAC). Transmission and distribution lines remain a natural monopoly (we only want one set of wires), but electricity generation need not be on a massive scale. Natural gas is increasing in use, and its plants are much smaller than nuclear plants. Also, there can be competition in marketing, as we heard from one of the students who worked in this area.

Question 7 Consumers often express a willingness to pay more for cleaner energy, a public good. If this claim is true, will we get the socially efficient outcome without the need for any government intervention? No. Public goods are subject to a free-rider problem, so some individuals will not contribute if they can get the benefits of cleaner energy, but let others pay the cost. We may get some clean energy, but not the socially efficient amount.

Question 8 One justification for subsidizing the use of renewable fuels is that at least in the U.S., we don’t currently price carbon emissions. Which market failure provides the best justification? Economies of scale Monopoly Second-best considerations Imperfect information Equity c) Second-best considerations

Question 9 In 2010, BP’s Deepwater Horizon oil rig exploded, causing nearly 5 million barrels of oil to spill into the waters of the Gulf of Mexico. Through agreements made between the company and the US Department of Justice, the total cost to BP between criminal and civil penalties and cleanup costs was over $40 billion. Describe this outcome from the perspectives of the Hicks-Kaldor and Pareto definitions of efficiency. Under which definition was this outcome a viable option?

Question 9 Answer It could be Pareto if there were no losers after compensation was paid. If the compensation was enough to compensate for losses, but there were losers who were not fully compensated, then it would be Hicks-Kaldor. If the compensation did not cover the losses, it was neither Pareto nor Hicks-Kaldor.

Question 10 Sustainability most resembles which philosophical view of fairness? Jeremy Bentham Ronald Coase John Rawls Plato c) Rawls