Economics of the Environment: Analysis of Economic Principles

This economics assignment delves into various aspects of environmental economics, commencing with an analysis of production data, diminishing returns, and cost calculations. It further explores market structures, contrasting perfect competition, monopolistic competition, oligopoly, and monopoly, while examining their characteristics, price-setting behaviors, and entry conditions. The assignment then investigates market failure, discussing externalities, public goods, and free riders, along with policy measures to address these issues. It provides detailed calculations of profit maximization under different market conditions, including scenarios with varying prices. Additionally, the assignment covers the circular flow diagram within the context of the New Zealand economy, analyzing financial sector dynamics and the impact of Fonterra's payouts on farmers and the broader economic landscape. The assignment provides insights into government interventions and policies to address market inefficiencies and promote economic well-being. The solution includes tables, figures, and detailed explanations.

Running head: ECONOMICS OF THE ENVIRONMENT
ECONOMICS OF THE ENIVIRONMENT
Name of the Student
Name of the University
Author’s Note

1ECONOMICS OF THE ENVIRONMENT
Table of Contents
Question 1.1.....................................................................................................................................3
Question 1.2.....................................................................................................................................4
Question 1.3.....................................................................................................................................5
Question 1.4.....................................................................................................................................8
Question 2.1.....................................................................................................................................9
Question 2.2...................................................................................................................................10
Question 2.3...................................................................................................................................10
Question 2.4...................................................................................................................................11
Question 2.5...................................................................................................................................12
Question 3.1...................................................................................................................................14
Question 3.2...................................................................................................................................15
Question 3.3...................................................................................................................................16
Question 3.4...................................................................................................................................16
Question 3.5...................................................................................................................................16
Question 3.6...................................................................................................................................17
Question 3.7...................................................................................................................................22

2ECONOMICS OF THE ENVIRONMENT
Question 1.1
1)
Units of
Labour Total product
Marginal
product
0 0 100
1 100 200
2 300 500
3 800 400
4 1200 200
5 1400 100
6 1500 50
7 1550 0
8 1550 0
Table 1: Production data for haymaking operation
Source: (Author’s creation)
2)
1 2 3 4 5 6 7 8 9
0
200
400
600
800
1000
1200
1400
1600
1800
PRODUCTION DATA FOR HAYMAKING
OPERATION
Total product
Marginal product
Units of Labour
Figure 1: Haymaking operation’s production data

3ECONOMICS OF THE ENVIRONMENT
Source: (Author’s creation)
3) Diminishing returns to scale occurs if the increase in output is less than proportional input
change. The diminishing returns to scale occur at the input level 500.
4)
Units of
labour
Total
output
Marginal
product
Total
fixed cost
Total
variable
cost
Total
cost
Aver
age
fixed
cost
Aver
age
varia
ble
cost
Aver
age
total
cost
Marg
inal
cost
0 0 400 0 400 0 0 0
1 100 100 400 100 500 4 1.0 5.0 1
2 300 200 400 200 600 1.3 0.7 2.0 0.5
3 800 500 400 300 700 0.5 0.4 0.9 0.2
4 1200 400 400 400 800 0.3 0.3 0.7 0.25
5 1400 200 400 500 900 0.3 0.4 0.6 0.5
6 1500 100 400 600 1000 0.3 0.4 0.7 1
7 1550 50 400 700 1100 0.3 0.5 0.7 2
8 1550 0 400 800 1200 0.3 0.5 0.8 0
Table 2: Calculation of cost
Source: (Author’s creation)
Question 1.2
Features Perfect
Competition
Monopolistic
Competition
Oligopoly Monopoly
Number of firms Number of entities
are large
Number of entities
are many but less
than that of perfect
competition
Few large
organizations exist
in the market
One entity exist in
market
Types of goods All entities
produces
Firms produce
differentiated
Differentiated Unique products
due to absence of

4ECONOMICS OF THE ENVIRONMENT
homogeneous
goods
goods goods other firms
Type of price
setting behavior
All entities are
price takers
Entities are price
makers
Entities influence
product prices
Entities are price
maker
Entry conditions No barriers in
firms entrance and
exit
No hurdle in
entrance and exit
Firms face barriers
in entering the
market
Entities face
hurdle in entrance
and exiting the
market
The form of
demand curve
Demand curve for
individual entity is
horizontal
Demand curve is
negatively sloped
Uncertain demand
curve (Kinked
shaped)
Negatively sloped
demand curve
Elasticity of
demand
Perfectly elastic
products
Elasticity of
demand is elevated
but not close to
perfectly elastic
Demand for
commodities is
elastic
Demand for
commodities is
relatively elastic.
Question 1.3
1) When price of hay is $ 1, the TR, MR, AR and Profit is shown in the table below:
Total
Output
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
Margina
l Cost
Aver
age
varia
ble
cost
Aver
age
total
cost
Total
reve
nue
Marg
inal
Reve
nue
Aver
age
Reve
nue
Pro
fit
0 400 0 400
100 400 100 500 1 1 5 100 1 1
-
40
0
300 400 200 600 0.5 0.67 2 300 1 1
-
30
0
800 400 300 700 0.2 0.38 0.88 800 1 1 10

5ECONOMICS OF THE ENVIRONMENT
0
1200 400 400 800 0.25 0.33 0.67 1200 1 1
40
0
1400 400 500 900 0.5 0.36 0.64 1400 1 1
50
0
1500 400 600 1000 1 0.4 0.67 1500 1 1
50
0
1550 400 700 1100 2 0.45 0.71 1550 1 1
45
0
1650 400 800 1200 1 0.5 0.78 1650 1 1
45
0
1700 400 900 1300 2 0.53 0.7 1700 1 1
40
0
Table 3: TR, MR, AR and Profit when hay price is $1.
Source: (Author’s creation)
2)
Total Output
100
300
800
1200
1400
1500
1550
1650
1700
0
0.5
1
1.5
2
2.5
Profit Maximizing Output Level
Price
Marginal Cost
Average varibale cost
Marginal Revenue
P=MC
Figure 2: Profit Maximizing output level
Source: (Author’s creation)

6ECONOMICS OF THE ENVIRONMENT
The above figure shows that price and marginal revenue curve is a horizontal line as it is
constant at all output levels. The marginal cost curve (MR=P) cuts from below and profit
maximizing output level occurs when MC intersects price curve (P=MC) at perfect competition
(Hall and Lieberman, 2012). However, this situation lies between the output levels 1400, where
profit is $500.
3)
Price Total output Total revenue Total cost Profit
0.5 100 50 500 -450
0.5 300 150 600 -450
0.5 800 400 700 -300
0.5 1200 600 800 -200
0.5 1400 700 900 -200
0.5 1500 750 1000 -250
0.5 1550 775 1100 -325
0.5 1650 825 1200 -375
0.5 1700 850 1300 -450
Table 4: Profit calculation when hay price falls to $0.50
Source: (Author’s creation)
If hay price falls at $0.50, the farmer would attain loss at each output level. Therefore, farmer
would minimize loss between the output levels 1200.
4)
Total output Price
Total
Revenue Total cost Profit
100 2 200 500 -300
300 2 600 600 0
800 2 1600 700 900
1200 2 2400 800 1600

7ECONOMICS OF THE ENVIRONMENT
1400 2 2800 900 1900
1500 2 3000 1000 2000
1550 2 3100 1100 2000
1650 2 3300 1200 2100
1700 2 3400 1300 2100
Table 5: Profit of farm when price rise to $2
Source: (Author’s creation)
If the price of hay rises to $2.00, the profit maximizing level occurs at output level 1650. The
amount of profit at this level is $2100.
Question 1.4
1)
Price
(P=AR)
Quantit
y
Total
revenue
Total
cost
Marginal
cost
Margina
l
Revenue
Averag
e
revenu
e
250 0 0 2000 120 225 0
225 25 5625 5000 80 175 225
200 50 10000 7000 55 125 200
175 75 13125 8375 75 75 175
150 100 15000 10250 110 25 150
125 125 15625 13000 160 -25 125
100 150 15000 17000 220 -75 100
75 175 13125 22500 300 -125 75
50 200 10000 30000 600 -175 50
25 225 5625 45000 200 25 25
Table 6: Calculation of cost and Revenue of Mono Phones
Source: (Author’s creation)

8ECONOMICS OF THE ENVIRONMENT
2)
0 25 50 75 100 125 150 175 200 225
-300
-200
-100
0
100
200
300
400
500
600
700
AR, MR AND MC CURVE
Marginal cost
Marginal Revenue
Average revenue
Total Quantity
MR=M
C
Figure 3: Profit maximizing point under monopoly.
Source: (Author’s creation)
As one entity exist in the monopoly market, the monopolist sets the product price with the
motive of attaining higher profitability. However, the entity attains equilibrium under two
circumstances:
 The first order condition where MR=MC.
 The second order condition where MC slope is higher than MR slope
3) Total profit attained by the monopolist at profit maximization point is $4750.
4) The total profit gained by the monopolist at revenue maximizing price is $2625.
Question 2.1
Market failure takes place because of inefficiency in product and services allocation. Few
reasons behind market failure include externalities, scarcity of public products, imperfect market,
and abundance of demerit products (Sikdar, 2012). Under imperfect competition, the monopolist

9ECONOMICS OF THE ENVIRONMENT
can restrict supply of goods and can create deadweight loss in the respective economy.
Therefore, market failure arises owing to under provision of products. Hence, imperfect markets
curbs output for maximizing profit and this creates failure in market.
Question 2.2
1) Councils flood production systems is considered as public good because of non- excludability
and non- rivalry. Non- excludability means that the people in the respective country are protected
irrespective of their contribution towards cost. Non-rivalry indicates if the country is protected
from increasing flood, it does not decrease the safety provided by the flood production system
for other nation.
2)Pedestrians are considered as free rider because they take benefits of using road safety sign for
slowing down traffic outside school without paying taxes for utilizing road as public goods.
Question 2.3
1) If a school introduces dragon boat racing and kappa haka program for benefitting young
people on academic studies, then it is considered as positive externality that leads to market
failure. Positive externality means positive spillover occurring from these activities will directly
influence the students in school (Rios et al., 2013). Therefore, introduction of this program will
refresh the students mind and this will increase their concentration in academic studies.
Theses cultural activities will motivate the students in winning the competition and receiving
certificates. After they leave the school, this certificate will help the students in showing their
skills in colleges or other job interviews.
2) Negative externality refers to the cost that third parties including entities, individual suffers
owing to economic transaction. Consumption of cigarettes is one of the examples of negative
externality. The smokers do not deem the impact on children due to passive smoking and
consumes for benefitting themselves. This is illustrated in the figure:

10ECONOMICS OF THE ENVIRONMENT
P1
P*
Q* Q1
MSC
MPBMSB
Negative externality
EXEXTERNALITY
Welfare loss
Quantity of cigarettes
Cigarettes price
Figure 4: Smoking as negative externalities
Source: (Author’s creation)
The government adopts policy measures for internalizing negative externalities of cigarettes
smoking that includes:
 Banning promotion of tobacco and restricts smoking in all public places.
 Increasing tax on tobacco
 Introducing campaigns for health education
Question 2.4
It is acceptable that New Zealand’s government must implement excise tax on tobacco products
because it is considered as one of the effective means of decreasing health hazards. Moreover, as
tobacco is luxury goods, shortage in tobacco production will not affect other people and less
demand for tobacco will hardly influence national income of New Zealand (McDowell and Nash,
2012). On the contrary, decline in intake of those products that leads to obesity will affect the
people in the country as it is a necessity goods. Therefore, if the government of New Zealand

11ECONOMICS OF THE ENVIRONMENT
Schooling Years
Cost and Benefits Demand curve
Change in supply curve
Initial supply curve
I
D
L
J
K
H
NM
implements fat tax on these products, then consumption of these products will decline. As a
result, the products supply will reduce and this will influence the country’s total income.
2) Four measures that the government of New Zealand must impose for discouraging eating of
fatty products and promoting healthier goods includes-
 Interpretive labeling on the package of fatty products
 Marketing regulation to children
 Increasing saturated at and beverage tax on sugary goods
 Removing GST from healthier foods
Question 2.5
Figure 5: Market for Education
1) ‘A’, B and C represents demand, initial supply and change in supply for education in the
market. This figure reflects how government intervention influences market demand and supply
curve. In this figure, equilibrium occurs at D where the demand and supply side of education
intersects each other. The government intervention targets education segment through its supply