Econ2216_2013_Assignment_1_Market_Failure_Due_to

Econ2216 (2013): Assignment #1 Market Failure Due to Externalities

Ruth Forsdyke Due: Monday, Jan. 28th in class. For algebraic questions, please show all work and use short sentences to guide reader through your work. Please use graph paper on page 4 for Problem 2. Problem 1: Dire Predictions (use DP to answer questions/ please be brief) a) Look at the picture of the Florida Keys on page 62 of DP. During the last interglacial period between 130,000 and 114,000 years ago, these were coral reefs. How much higher was the sea level estimated to be based on DP? During the depth of the last ice age, how much lower were the sea levels? b) Look at the three types of Milankovitch orbital cycles pictures on page 63. Which orbital cycle change is thought to have initiated the end of the last ice age? c) List two feedbacks which amplified the effect in b. d) How high were the ice caps which covered most of Canada and the Northern US during the last ice age? (pg. 62) e) Increasing GHGs increases the rate at which water evaporates to become water vapour which forms clouds. Clouds reflect light back to space if they are low but trap heat if they are high. Overall, models suggest that clouds cool the Earth. Is this an example of a negative or positive feedback effect? (pg. 25). f) When GHGs rise, it gets hotter in summer and in equatorial countries. People then use their air conditioners more. Is this an example of a negative or positive feedback loop? Draw a “systems diagram” to illustrate. See lecture note 2. g) We discussed ice core proxy measures which allow scientists to estimate temperatures and GHG concentrations going back 800,000 years. Fossils are another type of proxy measure, which allow estimates to be made even further back in time. Briefly explain how scientists use fossil ferns to get proxies of past temperatures going back tens of millions of years. Based on such proxies, i) how high might the atmosphere’s carbon dioxide concentration rise to if we burn the estimated remaining fossil fuel reserves? How far back in time do we need to go to get estimates of CO2 that are this high? (pg. 42 – 43) h) Currently, the atmosphere’s concentration of carbon dioxide is 392 ppm. Based on the graph on page 41, how far back in time do we need to go to get CO2 concentrations that are this high. Based on the temperature graph immediately above the CO2 graph, how much higher were the polar temperatures relative to today? i) Based on pg 27, identify human caused sources of nitrous oxide (N2O). How long is the average N2O molecule expected to remain in the atmosphere? Problem 2: Kaya Equation a) Please go to the following World Bank website to get the population for China in 2002. http://data.worldbank.org/indicator/SP.POP.TOTL?page=2 b) Consider the following numbers for China in 2002:

Average GDP/capita = $ 4379/person CO2 emissions from energy use = 0.26483 tonnes CO2/megaWatthour. Average Energy Used to Produce each unit of GDP = 2548 megaWatthour/million $.

Find per capita GDP for China in 2002. c) Find aggregate energy CO2 emissions for China in 2002.

Problem 3: Coal is the single largest source of GHG emissions in the world. In 2010, the combustion of coal to produce electricity, to provide heat, and to make steel caused 13.029 gigatonnes (Gt) of CO2 to be released into the atmosphere. In this question, we will assume there is one type of coal and that there is one global coal price. 1 Let P represent the price of coal in $ tonne and let Q represent the quantity in Gt/year. Suppose that the world supply and world demand for coal are respectively represented by the equations: QS(P) = P/10 QD(P) = 10 – P/40 Note that I have assumed linear demand and supply curves for heuristic purposes while in reality, we would expect demand to get steeper and steeper at low quantities and supply to become steeper and steeper at high quantities. The market equilibrium point is roughly calibrated to data with quantity being accurate and price not being accurate. Assume competitive markets although this may be a poor assumption given oligopolistic markets. a) Find the inverse demand and inverse supply for coal and use these to get the marginal private cost and marginal private benefit (marginal WTP) equations. b) Plot the marginal $ private benefit ($MBPrivate) and marginal $ private cost (MCPrivate) curves on the graph paper provided (figure 1). Label axis including units and give your graph a title. b) Equate MBPrivate with MCPrivate to find the market equilibrium quantity and price of coal and label on your graph. c) At the market equilibrium quantity, find the following and label on your graph. Please show work.

i) Total $WTP to pay for coal (total consumer benefits) ii) Total $ Consumer Expenditure on coal (total consumer costs) iii) Total $ Producer Revenue from coal (total producer benefits) iv) Total $ Producer Variable Costs v) Total $ Producer Surplus vi) Total Private Surplus

d) Each tonne of coal combusted created an average of 1.7 tonnes CO2 in 2010. Suppose that the 2011 carbon price is $100/tonne CO2, that is each tonne of CO2 causes $100 of damages to society. Multiplying, we get an estimate of the marginal external cost of coal (MCExternal) of $170/ tonne. We will ignore other coal damages like local air pollutants such as SO2, NOx, Mercury (Hg), ground level ozone, and ecosystem damages due to mining. Add the MCExternal to the MCPrivate to get the MCSocial as a function of the quantity of coal. e) Re-plot the marginal private cost and marginal private benefit curves on figure 2 along with the marginal external cost, marginal social cost and marginal social benefit curves. Re-label the market quantity and price. f) Solve for the socially efficient quantity and price and label on your graph. g) At the socially efficient quantity and price, label the following:

i) total external costs 1 In reality, there are a variety of different types of coal and these are used for a variety of purposes including electricity and heat production and coking coal to make steel. Also, coal prices are differ between regions. To do this properly, we would need to weight different coal prices by the quantity of each type.

ii) total private costs iii) total social costs iv) total social benefits v) total social surplus vi) loss of total social surplus (deadweight loss at the market quantity)

h) What world coal quota could you impose to attain monetary social efficiency? Illustrate on your graph. i) Calculate the marginal tax on coal producers that could be used to attain monetary social efficiency and illustrate how this shifts the coal supply curve. Label the marginal tax. j) Label the total tax collected and calculate. k) Both the quota or the tax policy will theoretically increase coal prices by the same amount causing increases in the price of electricity, heating and steel. These price increases will hurt poor and middle-income people. Which of the above two policies would provide the government with the ability to compensate the poor and to finance low GHG energy adoption? Briefly explain. l) Would these policies provide incentives for firms to develop carbon capture and storage technology (CCS)? Note: I have ignored positive externalities from coal. Coal is used to provide the energy to make many goods (ex. education, immunization), many of which confer positive externalities.

Figure 1: _____________________________________________________________ Figure 2:______________________________________________________

100

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400

100

200

300

400

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E11-16

Before preparing financial statements for the current year, the chief accountant for Springer Company discovered the following errors in the accounts.

1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest Expense $50,000 and a credit to Cash $50,000.

2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the market value per share was $16. The only entry made was: Retained Earnings (Dr.) $10,000 and Dividend Payable (Cr.) $10,000. The shares have not been issued.

3. A 4-for-i stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.

Prepare the correcting entries at December 31. (For multiple debit/credit entries, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

CCoUflt/ DescriDtion Debit’ Credit

Ii. Dec. bi I I I

I I II 12. Dec.

L31 I____________________________

I i___________________________________________________________________ I I I I

I I Ii 13. Dec. bi I I I I Ii 1.1 I I

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Condensed financial data of Arma Inc. follow.

ARMA INC. Comparative Balance Sheets

December 31 Assets 2011 2010 Cash $90,800 $48,400 Accounts receivable 92,800 33,000 Inventories 112,500 102,850 Prepaid expenses 28,400 26,000 Investments 138,000 114,000 Plant assets 270,000 242,500 Accumulated depreciation (50,000) (52,000)

Total $682,500 $514,750

Liabilities and Stockholders’ Eauitv Accounts payable $112,000 $67,300 Accrued expenses payable 16,500 17,000 Bonds payable 110,000 150,000 Common stock 220,000 175,000 Retained earnings 224,000 105,450

Total $682,500 $514,750

ARMA INC. Income Statement

For the Year Ended December 31, 2011 Sales $392,780 Less:

Cost of goods sold $135,460 Operating expenses, excluding depreciation 12,410 Depreciation expense 46,500 Income taxes 27,280 Interest expense 4,730 Loss on sale of plant assets 7,500 233,880

Net income $158,900

Additional information:

1. New plant assets costing $85,000 were purchased for cash during the year. 2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. 3. Bonds matured and were paid off at face value for cash. 4. A cash dividend of $40,350 was declared and paid during the year.

Complete the statement of cash flows using the indirect method. (List amounts from largest

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positive to smallest positive followed by most negative to least negative, e.g . 15, 14, 10, -17,

-5, -1. If amount decreases cash flow, use either a negative sign pre ceding the number e.g.

-45 or parentheses e.g. (45).)

ARMA INC.

Statement of Cash Flows

For the Year Ended December 31, 2011

I I Adjustments to reconcile net income to net

cash provided by operating activities

I I

I I I I I I Net cash I by

operating activities

Cash flows from investing activities

I I I I I I

Net cash investing activities

Cash flows from financing activities

I 7 Net cash I I by

financing activities

Net1 I in cash Cash at beginning of period

Cash flows from operating activities

$1 I I I I I I I I I I

-j I_i I

I I I I

I I

I Ij by

I I

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Cash at end of period I

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Financial information for Blevins Inc. is presented below.

Current assets

Plant assets (net)

Current liabilities

Long-term liabilities Common stock, $1 par Retained earnings

Total stockholders equity

Total liabilities and stockholders’ equity

December 31, 2012

$125,000

396,000

91,000

133,000

161,000

136,000

Condensed Balance Sheet December 31

December 31, 2011

$100,000

330,000

70,000

95,000

115,000

150,000

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Complete the schedule showing a horizontal analysis for 2012 using 2011 as the base year. (If amount isa decrease, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round percentages to 1 decimal place, e.g. 10.5. List items in the order given in the question.)

BLEVINS INC.

Increase or (Decrease) 2012 2011 Amount Percentage

Assets

I I$I I$I I si II lob I 1± LL Li II lola

Total assets I $1 I $1 I I 1%

Liabilities

I isI IsI I l 1 1% I I_J I__I I___l I I I°,

Total liabilities I si I sI Stockholders’ Equity

I IsI IsI I si II lob I I...] I...] l.......I I I lo,o

isi I si ir 1°bo •II I I I loin

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On October 31, the stockholders equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-i stock split that will reduce par value to $5 per share. The current market price is $14 per share.

Complete the tabular summary of the effects of the alternative actions on the components of stockholders equity and outstanding shares. (If answer is zero, please enter 0. Do not leave any fields blank.)

Stockholders equity Paid-in capital

Common Stock

In excess of par value

Total paid-in capital

Retained earnings

equity Total stockholders

Outstanding shares

Before Action After Stock Dividend After Stock Split

sL IsF IsI I 1 11 I_J_______

I I I I I I_i II I

$1 I__i I $1

J Li II I

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Indicate whether each of the following statements is true or false.

JE]The corporation is an entity separate and distinct from its owners.

gfriiiability of stockholders is normally limited to their investment in the r Icorporation.

[me relative lack of government regulation is an advantage of the F Icorporate form of business. JZ [There is no journal entry to record the authorization of capital stock. 1’:—_No-par value stock is quite rare today.

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The comparative statements of Villa Tool Company are presented below.

VILLA TOOL COMPANY Income Statement

For the Year Ended December 31.

2012 201.1. Net sales $1,818,500 $1,750,500 Cost of goods sold 1,011,500 996,000 Gross profit 807,000 754,500 Selling and administrative expense 516,000 479,000 Income from operations 291,000 275,500 Other expenses and losses

Interest expense 18,000 14,000 Income before income taxes 273,000 261,500 Income tax expense 81,000 77,000 Net income $ 192,000 $ 184,500

VILLA TOOL COMPANY Balance Sheets December 31

Assets 2012 2011. Current assets

Cash $ 60,100 $ 64,200 Short-term investments 69,000 50,000 Accounts receivable (net) 117,800 102,800 Inventory 123,000 115,500

Total current assets 369,900 332,500 Plant assets (net) 600,300 520,300 Total assets $970,200 $852,800

Liabilities and Stockholders Equity Current liabilities

Accounts payable $160,000 $145,400 Income taxes payable 43,500 42,000

Total current liabilities 203,500 187,400 Bonds payable 200,000 200,000

Total liabilities 403,500 387,400 Stockholders equity

Common stock ($5 par) 280,000 300,000 Retained earnings 286,700 165,400

Total stockholders equity 566,700 465,400

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Total liabilities and stockholders equity $970,200

_________

Compute the following ratios for 2012. (Weighted average common shares in 2012 were 57,000, and all

sales were on account.) (Round earnings per share, current ratio and acid-test ratio to 2

decimal places, e.g. 10.50. Round other answers to I decimal place, e.g. 10.5.)

lEarnings per share

$852,800

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Condensed financial data of Arma Inc. follow.

ARMA INC. Comparative Balance Sheets

December 31

Assets 2011 2010 Cash $90,800 $48,400 Accounts receivable 92,800 33,000 Inventories 112,500 102,850 Prepaid expenses 28,400 26,000 Investments 138,000 114,000 Plant assets 270,000 242,500 Accumulated depreciation (50,000) (52,000)

Total $682,500 $514,750

Liabilities and Stockholders’ Equity Accounts payable $112,000 $67,300 Accrued expenses payable 16,500 17,000 Bonds payable 110,000 150,000 Common stock 220,000 175,000 Retained earnings 224,000 105,450

Total $682,500 $514,750

ARMA INC. Income Statement

For the Year Ended December 31, 2011 Sales $392,780 Less:

Cost of goods sold $135,460 Operating expenses, excluding depredation 12,410 Depreciation expense 46,500 Income taxes 27,280 Interest expense 4,730 Loss on sale of plant assets 7,500 233,880

Net income $158,900

Additional information:

Further analysis reveals that accounts payable pertain to merchandise creditors.

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Complete the statement of cash flows for Arma Inc. using the direct method. (List amounts from

largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14,

10, -17, -5, -1. If amount decreases cash flow for financing and investing activities, use either

a negative sign preceding the number e.g. -45 or parentheses e.g. (45). List all other

amounts as positive.)

ARMA INC.

Statement of Cash Flows

For the Year Ended December 31, 2011

I I Less cash payments

Cash flows from investing activities

Net cash activities

by investing

Cash flows from financing activities

I I I I I I

Net cash L financing activities

Net I Cash at beginning of period

Cash at end of period

I in cash

J by

$1 I

Cash flows from operating activities

I I I I I I I I

sL L I

Net cash operating activities

j by

I-i 1

I I I I

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Here are comparative balance sheets for Taguchi Company.

TAGUCH! COMPANY Comparative Balance Sheets

December 31 Assets 2011 2010 Cash $73,000 $22,000 Accounts receivable 85,000 76,000 tnventories 170,000 189,000 Land 75,000 100,000 Equipment 260,000 200,000 Accumulated depreciation (66,000) (32,000)

Total $597,000 $555,000

Liabilities and Stockholders Equity Accounts payable $39,000 $47,000 Bonds payable 150,000 200,000 Common stock ($1 par) 216,000 174,000 Retained earnings 192,000 134,000

Total $597,000 $555,000

Additional information:

1. Net income for 2011 was $103,000. 2. Cash dividends of $45,000 were declared and paid. 3. Bonds payable amounting to $50,000 were redeemed for cash $50,000. 4. Common stock was issued for $42,000 cash. 5. No equipment was sold during 2011, but land was sold at cost.

Complete the statement of cash flows for 2011 using the indirect method. (List amounts from largest positive to smallest positive followed by most negative to least negative, e.g. 15, 14, 10, -17, -5, -1. If amount decreases cash flow, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

TAGUCHI COMPANY Statement of Cash Flows

For the Year Ended December 31, 2011 Cash flows from operating activities

I I s I Adjustments to reconcile net income

to net cash provided by operating activities

I I $1 I

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I I I I . I

I I I I

Net cash r I by financing

Net I I in cash Cash at beginning of period

Cash at end of period

I I I I

F I

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_____________________

Net cash I I by operating activities

Cash flows from investing activities

J_j

Net cash I I by investing activities

Cash flows from financing activities

I. I

activities

j 1

_J I

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Pioneer Corporation had the transactions below during 2011.

Analyze the transactions and indicate whether each transaction resulted in a cash flow from operating activities, investing activities, financing activities, or noncash investing and financing activities.

(a) Issued $50,000 par value common stock for cash. I I Purchased a machine for $30,000, giving a long-term note in exchange. I I

J Issued $200,000 par value common stock uponC conversion of bonds having a face value of $200,000. I I

(d) Declared and paid a cash dividend of $18,000. p e’

Sold a long-term investment with a cost of $15,000 ‘‘ for $15,000 cash. I (f) Collected $16,000 of accounts receivable. I (g) Paid $18,000 on accounts payable. I I

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P11-6A Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8°h, noncumulative preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2011, the ledger contained the following balances pertaining to stockholders equity.

Preferred Stock Paid-in Capital in Excess of Par Value-Preferred Common Stock Paid-in Capital in Excess of Stated Value-Common Treasury Stock-Common (1,000 shares) Paid-in Capital from Treasury Stock Retained Earnings

The preferred stock was issued for land having a fair market value of $296,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2011.

Prepare the journal entries for the: (For multiple debit/credit entrjes, list amounts from largest to smallest e.g. 10, 5, 3, 2.)

1. Issuance of preferred stock for land. 2. Issuance of common stock for cash. 3. Purchase of common treasury stock for cash. 4. Sale of treasury stock for cash.

L 1

$240,000 56,000

2,000,000 5,700,000

22,000 3,000

560,000

‘&ccount/DescriDtion Debiti Credit

I — I Ii

: I

I I Ii [ i

E1i ii______________ 1 i I I

ki______________________ ii

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F__I i I Ii ii Complete the stockholders equity section at December 31, 2011. (Order multiple accounts in t

standard format used in the text. Enter all amounts as positive amounts and subtract where

necessary.)

Stockholders’ equity Paid-in capital

ARNOLD CORPORATION

I I

$1 noncumulative, L__

shares authorized,

outstanding

I I, sL J stated value,

shares authorized

I shares issued and

I I

I Total additional paid-in capital

Total paid-in capital

I I earnings

Less:

Total paid-in capital and retained

I I Total stockholders’ equity

sI I

I $1

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I par value,

I shares issued and $1__

Total capital stock I joutstanding I I

I I

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The following stockholders equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011.

Complete the stockholders equity section at December 31, 2011. (List entries by the format used in the text. Enter all amounts as positIve amounts and subtract where necessary.)

I I I I, $L j par noncumulative

L outstanding

Total capital stock

I I I I I I

] shares issued and

j stated value,

shares issued and

outstanding

Total additional paid-in capital

Total paid-in capital

Common Stock ($10 stated value) Paid-in Capital from Treasury Stock Paid-in Capital in Excess of Stated Value-Common Stock Paid-in Capital in Excess of Par Value-Preferred Stock Preferred Stock (8%, $100 par, noncumulative) Retained Earnings Treasury Stock-Common (8,000 shares)

$1,500,000 6,000

690,000 288,400 400,000 776,000

88,000

Stockholders equity Paid-in capital

MCGRATH CORPORATXON

I I,

I I

$1 I

I I

J I

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earnings

Less:

Total paid-in capital and retained

Total stockholders equity

I I $1 I

Compute the book value per share of the common stock, assuming the preferred stoc k has a call price

of $110 per share. (Round answer to 2 decimal places, e.g. 10.50.)

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