INSTRUCTOR DISCUSSION NOTES:
President Bush Becomes an Environmentalist in his State of the Union, Sort Of.

1. Is the current consumption of fossil fuels efficient? Why or why not? Draw a graph to support your answer.

No, because of the external cost present. Social marginal costs are higher than private marginal costs.

2. Given that the production of alternative energy is not competitive, what will it take to meet the President's goal by 2017?

This will require a significant investment in infrastructure; long run total costs will increase as a result. But the current external cost should be minimized.

3. Suppose instead of the emphasis on alternative energy, a tax on gasoline consumption were imposed. Would that have the same impact as the suggestions by the President?

That depends on the size of the tax. Increasing the tax on gasoline will raise the production costs, and therefore begin to "internalize the externality" associated with fossil fuel consumption. It will also make investment in alternative energy consumption more competitive.

Multiple Choice/True False Questions

1. What do you think will happen to the price of oil as the Strategic Petroleum Reserve is increased over time?

  1. Price should increase
  2. Price should decrease
  3. Price should remain the same
  4. Price should become more elastic.
ANS .a

2. The need to reduce fossil fuel consumption recognizes the need to combat the presence of a(n)
  1. External cost
  2. External benefit
  3. Opportunity cost
  4. Explicit cost
ANS . a

3. Fossil fuel consumption is considered too high for soicety's standards because
  1. Private costs of consumption are higher than social costs of consumption
  2. Private costs of consumption are lower than social costs of consumption
  3. Private benefits of consumption are higher than social benefits of consumption
  4. Private benefits of consumption are lower than social benefits of consumption.
ANS . b

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