final
PPD 501b Final Exam Fall 2012
Answer 3 out of 4 questions (be sure to explain your answers). You have 2.5 hours.
1. Explain the workings of a system of tradable carbon emission permits (cap and trade) in an international setting:
a. Explain how the overall emissions cap is set in relation to costs and benefits of greenhouse gas emission reduction. Explain how equity affects how permits are assigned to individual countries.
b. Explain how an individual country reacts to the permit price in terms of purchase and sales of permits. How is the permit price set?
c. How does cap and trade perform in terms of efficiency and equity?
d. Explain the difference in outcomes in terms of efficiency and equity of whether permits are freely granted or auctioned to the highest bidder.
2. With respect to Asymmetric Information:
a. Discuss two major types of information asymmetry in the private sector and how they lead to market failure.
b. Discuss a public sector remedy for each problem.
c. Discuss a private sector remedy for each.
d. Discuss two major sources of market failure due to information asymmetry in relation to the provision of public goods and services by the government.
3. With respect to decision-making under uncertainty:
a. Define risk and explain how we measure it. Explain the risk premium and its usefulness (provide and example).
b. What is meant by risk aversion? Explain how a “risk averse” person approaches problems of uncertainty in relation to the tradeoff between risk and return.
c. If you were the financial manager of a hospital or city government, explain two ways to reduce risk to your institution.
d. What is moral hazard? How does it relate to
Answer 3 out of 4 questions (be sure to explain your answers). You have 2.5 hours.
1. Explain the workings of a system of tradable carbon emission permits (cap and trade) in an international setting:
a. Explain how the overall emissions cap is set in relation to costs and benefits of greenhouse gas emission reduction. Explain how equity affects how permits are assigned to individual countries.
b. Explain how an individual country reacts to the permit price in terms of purchase and sales of permits. How is the permit price set?
c. How does cap and trade perform in terms of efficiency and equity?
d. Explain the difference in outcomes in terms of efficiency and equity of whether permits are freely granted or auctioned to the highest bidder.
2. With respect to Asymmetric Information:
a. Discuss two major types of information asymmetry in the private sector and how they lead to market failure.
b. Discuss a public sector remedy for each problem.
c. Discuss a private sector remedy for each.
d. Discuss two major sources of market failure due to information asymmetry in relation to the provision of public goods and services by the government.
3. With respect to decision-making under uncertainty:
a. Define risk and explain how we measure it. Explain the risk premium and its usefulness (provide and example).
b. What is meant by risk aversion? Explain how a “risk averse” person approaches problems of uncertainty in relation to the tradeoff between risk and return.
c. If you were the financial manager of a hospital or city government, explain two ways to reduce risk to your institution.
d. What is moral hazard? How does it relate to