# Economics of the Environment

Hey, I have answered question 1-4 and need someone to answer question 5 and go through my answers for question 1-4 and add any details I may be missing. I need detailed answers to the questions. Please only bid if you know how to do these questions. Do not bid if you are unsure how to do the following questions below. My answers are attached (questions doc) and two tutorial notes.

Thanks

It is sometimes claimed that free trade improves welfare. These questions explore this proposition. The model we will be using for trade is a simple supply and demand diagram where any amount can be brought or sold at the world price. If the world price is above the ‘no trade’ (autarky) price, there are exports, and if it is below there are imports. There is a good explanation at [but apologies for the sexual reference in first slide]

Question 1 (3 marks) Suppose Demand is P=100-3Q and supply is P=Q. Draw this demand and supply diagram for a closed economy (no imports or exports are possible) with the standard axes (P vertical, Q horizontal). Mark carefully on the diagram (for one mark each) the demand curve, the supply curve, and then work out the equilibrium (the numbers are required, not just showing the point).

Question 2 (5 marks) Mark on a new diagram a world price of 30 (1 mark); explain why no goods will be bought or sold at the autarky price (1 mark); how much is demanded at price 30? (1 mark); how much is supplied (1 mark); explain what happens to the difference between supply and demand at that price (1 mark).

Question 3 (5 marks) Mark on a new diagram a world price of 20 (1 mark); explain why no goods will be bought or sold at the autarky price (1 mark); how much is demanded at price 20? (1 mark); how much is supplied (1 mark); explain what happens to the difference between demand and supply at that price (1 mark).

Question 4 (2 marks) Mark on two new diagrams what the supply and demand curves look like (i) in the presence of a negative consumption externality with a constant value of 20 for every unit consumed and seperately (ii) in the presence of a negative production externality with a constant value of 20 for every unit consumed.

Question 5 (7 marks) Consider a market described by these demand and supply curves with the production and consumption externalities described in Question 4, and exploring the cases when the world price is 20 or 30. Does free trade always improve welfare? (1 mark) To answer this question do the following welfare calculations (1 mark for each) and see if the trade situations have higher welfare than the autarky situation. (Remember, when free trade is allowed, the world price might be above, or below, the autarky price, which is why we have to consider both cases if we want to generalize about free trade.)

For the production externality case calculate welfare in the following cases: (i) no trade with only a production externality vs (ii) importing with only a production externality and (iii) exporting with only a production externality . Then consider the consumption externality case by calculating welfare in the following cases (again, 1 mark each) (iv) no trade with only a consumption externality vs (v) importing with only a consumption externality and (vi) exporting with only a consumption externality. Your measure of welfare should always be Consumer Surplus (CS, i.e. area below demand above price) + Producer Surplus (PS, i.e. area above supply curve and below price) + any externality (which is negative in both cases).

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