Hydraulic cement (primarily Portland cement) is a key component of concrete. In 2007, the U.S. cement
industry produced over 90 million metric tons of Portland cement. The production of cement is associated
with emissions of a number of pollutants that are known to increase mortality and morbidity rates upon
exposure. In 2009, The U.S. Environmental Protection Agency (EPA) proposed amendments to the National Emission Standards for Hazardous Air Pollutants (NESHAP) for the Portland cement manufacturing
industry. The amendments revised emission limits for mercury, total hydrocarbons, hydrogen chloride, and
particulate matter from kilns located at a major or area sources. The costs of achieving these new emission
limits include a variety of pollution control expenditures: equipment installation, operating and maintenance,
record keeping, and performance-testing activities. In this assignment you will conduct a partial equilibrium
analysis to estimate the costs of these standards under a variety of assumptions. To simplify our analysis
we focus on the cement industry in the Pacific Northwest, the Seattle market specifically. Each question is
worth equal points.
1 Super Simple Social Cost Analysis
In 2005 1.1 million metric tons of cement were sold at a price of $88. It has been estimated that the average
compliance cost associated with the NESHAP is $1.6 per metric ton.
The simplest analysis would assume:
• perfectly competitive market for cement with many producer and consumers,
• perfectly inelastic demand for cement,
• and a constant marginal cost of production.
Under those assumptions conduct a cost estimate to answer the following questions:
a. What is the change in the equilibrium quantity?
b. What is the change in the equilibrium price?
c. What are the social costs of the policy?
d. What percentage of the costs are borne by consumers and what percentage is borne by producers?
e. How does this estimate of social costs relate to ex ante compliance costs?
(Hint: The observed price, constant marginal cost assumption, and perfect competition assumption can be
combined to get the supply curve.)
2 Endogenous Demand
The demand for cement is driven by the demand for concrete, which is driven primarily by the demand
for construction. In practice the demand for cement will not be perfectly inelastic, as the price increases
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the demand by the construction industry will fall as they substitute towards other building materials, other
building designs, etc. Based on observations in the cement market assume a demand elasticity for cement of
η = −1.09. We want to use this information about the price responsiveness of cement demand to improve
our social cost analysis. Assume that the policy in question is marginal such that the demand curve is locally
linear around the current equilibrium, such that
Q = a + bP, (1)
where a is the intercept, b is the slope, P is the market price, and Q is the quantity demanded.
Applying the new assumption regarding the demand curve to your cost analysis, to answer the following
questions:
a. What is the change in the equilibrium quantity?
b. What is the change in the equilibrium price?
c. What are the social costs of the policy?
d. What percentage of the costs are borne by consumers and what percentage is borne by producers?
e. In what direction does the social cost move when incorporating endogenous demand and why?
f. How does this estimate of social costs relate to ex post compliance costs?