Econ 379-001 Home Work 1:
Instruction: Your answers should be type written and should be submitted through a link provided on the Blackboard. If you are unable to draw your graphs or equations with the help of your computer, you can draw them manually and scan and submit your answer.
Write down your answers using your own words. It is not appropriate to copy and paste text from the internet and it may result in zero score.
Due on: 01/31 @11:59PM
Part I. The Market for Recycled Newsprint
The amount of trash generated in the United States has risen from 88.1 million tons in 1960 to 243.0 million tons in 2009. Of this tonnage, approximately 28.2 percent is paper and paperboard. In a logical move, many communities established paper recycling programs in the 1980s. The first step was to encourage individuals and firms to bring paper wastes to collection centers. According to EPA data, as shown in the accompanying table, this recovery stage has met with some success.
Types of Paper Waste
Containers and packaging Newspaper
Books
Magazines
Office papers
Percent Recovered
1980 1990 2000 2009
16.1 26.0 38.1 47.8 27.3 38.0 59.0 88.1 8.3* 10.3 19.4 33.3 --- 10.6 31.8 53.8 21.8 26.5 55.1 74.2
*The 8.3 in 1980 represents books and magazines, which were reported in the aggregate prior to 1990.
Although these data suggest that society responded responsibly, they belie a very real problem. Many communities failed to recognize the need to create a market for recovered materials. This was precisely the problem that arose during the late 1980s and continued into the 1990s. The
result was insufficient demand for recovered newspapers, and the excess supply sent the price of used newsprint plummeting.
To correct the problem, it was necessary to stimulate market demand. Virtually all levels of government took an active role. A number of state governments passed laws requiring newspapers to be partly printed on recycled paper. At the federal level, President Clinton signed Executive Order 12873, calling for all printing and writing paper to contain at least 20 percent recovered paper. (This amount was subsequently raised to 30 percent in Executive Order 13101.) The EPA established clearinghouses and hotlines to bring together suppliers and demanders of recyclables. Added influences were the thriving domestic economy and the rising demand of developing nations, whose growth required new sources of paper inputs.
Taken together, market demand eventually swamped existing supplies, and in 1995, there was a shortage of recycled newsprint. Just as predicted by economic theory, the shortage placed upward pressure on price, which rose to between $100 and $200 per ton. The boom in the market was temporary, however. By 1996, excess supplies and falling demand drove prices back to the $20 per ton level of the early 1990s.
Such volatility is characteristic of this market and continues through the present day. As a case in point, assume that the market demand for recycled newsprint in 2011 is QD = 200–2P and that
market of tons
a) b) c)
d)
supply is QS =–150 + 5P, where P is the price per ton and Q is the quantity in thousands per year.
Based on these equations, determine the equilibrium quantity (QE) and price (PE) of recycled newsprint.
Graphically illustrate the recycled newsprint market based on the supply and demand equations given. Provide numerical labels, including the values derived in Question 1. Suppose that as a consequence of market changes, the selling price of recycled newspaper is $35 per ton. At this price level, is the market in an equilibrium, shortage, or surplus condition? Be sure to support with specific values.
Based on the market condition you determined in Question 3, what do you expect will happen to the price of recycled newsprint?
Sources: U.S. EPA, Office of Solid Waste (December 2010), Table 1, p. 36; Table 16, p. 82;Reidy (July 24, 1996); “Newspaper Recycling Booming,” (July 11, 1995).
Part II. Bottled water label
In 1995, the Food and Drug Administration (FDA) published new labeling standards for bottled water. (The full text of the final rule can be found at http://www.cfsan.fda.gov/~lrd/n095- 323.txt). Prior to that time, bottlers could sell regular tap water under a bottled water label. In fact, the FDA estimated that approximately 25 percent of the supply of bottled water was nothing more than ordinary tap water. Consider how these tougher standards eliminated 25 percent of the supply of bottled water. If market demand is unaffected, what qualitative impact would this labeling change have on equilibrium price and quantity for bottled water? Support your answer with a graphical model.
Part III. Residual from textile mill
New Hampshire textile mill releases pollution into nearby wetlands, and the associated health and ecological damages are not considered in the private market. Suppose you are an
environmental economist working with the following marginal benefits and costs for this market, where Q is thousands of pounds and P is price per pound.
MPB = 800–0.5Q MPC = 20 + 0.3Q MEB=0 MEC = 0.4Q
a) Find the competitive equilibrium, QC and PC, and the efficient equilibrium, QE and PE.