ECON 311 Final Exam Fall 2009

Transcription

1 ECON 311: Economics of the Environment Name: Fall 2009 Bellas Final Exam You have three hours and twenty minutes to complete this exam. Answer all questions, explain your answers, label axes and curves on graphs and do your own work. Fifty points total, points per part indicated in parentheses. 1. Let s start with the basics. On a graph with abatement on the horizontal axis, show which area is equivalent to the cost savings from adopting a new, lower cost abatement technology under the following regulatory regimes. A. Flexible standard. (2) B. Flexible emission fee. (2) Page 1 of 10

2 2. Imagine that a car battery costs $30 to manufacture and $60 to dispose of properly. This same battery, however, can be disposed of improperly in such a way that it cannot be traced back to its owner at a cost of $30. What is the range of subsidies that might be offered for proper disposal that would effectively encourage disposal without encouraging companies to produce batteries just to dispose of them and collect the fee? (2) 3. Imagine that a rancher who raises steers and a farmer who grows crops operate right next to each other. The problem is that the steers do some damage to the farmers crops, as described in the table below. # of steers Marginal private cost Marginal crop damage 1 $100 $50 2 $200 $50 3 $300 $50 4 $400 $50 5 $500 $50 Imagine that the price of a steer is $375. A. What is the efficient number of steers for the rancher to raise? (2) B. If the farmer has the right to keep the rancher from raising any steers at all, how would Coasian bargaining work to achieve the efficient solution? Please be clear about the possible dollar amounts of any payments that might be made. (3) Page 2 of 10

3 4. Consider the following statistics: Table 18-2 AUS CAN FRA JAP MEX SWE USA Emissions SO2 (kg/cap) NO (kg/cap) CO2 (tons/cap) WWT (% of pop) n/a 72% 79% 64% 25% 86% 71% MSW (kg/cap) Nuclear Waste* WWT is waste water treatment. MSW is municipal solid waste. A. Based on these statistics, is environmental quality better in Japan or in Mexico? Explain your answer. (2) B. Is your answer to part A consistent with the story behind the environmental Kuznets curve? Why or why not? (2) Page 3 of 10

4 5. Municipal solid waste (MSW) is a lot of fun, sort of. According to the textbook, MSW is an environmental problem that may be appropriately handled at the local or state level. A. Why is it appropriate to deal with issues related to MSW at the state or local level when state or local regulation has lead to many problems when dealing with air and water pollution issues? (2) B. Under what conditions would MSW need to be regulated at the federal level? Explain. (2) 6. Economists usually support measuring emissions and then making emitters pay for the emitting that they do. Most economists support this approach to controlling emissions at stationary sources, such as coal-fired power plants. However, most economists probably wouldn t support this approach for dealing with automobile emissions. Explain why economists, who generally favor measuring and charging for stationary source emissions, don t advocate this approach for mobile source emissions. (3) Page 4 of 10

5 7. Doing a benefit-cost analysis of the Clean Air Act (CAA) is probably impractical, but at least we can think about it in theory. Imagine that the CAA is actually a large number of independent projects and that the decision to be made about the CAA is its proper scale. Consider the graph below: A. Indicate the scale of CAA that would maximize the benefit cost ratio of the CAA. Label this A. (2) B. Indicate the scale of CAA that would maximize the net benefits of the CAA. Label this B. (2) 8. Imagine that a state s environmental agency has the resources to clean up one of two polluted lakes. If the decision about which lake to clean up was based on results of a travel cost analysis, what characteristics would make it more likely that a lake would be selected? (2) Page 5 of 10

6 9. There s currently a lot of concern about the state of the Atlantic tuna fishery, and many people are worried that Atlantic tuna are on the brink of extinction. One proposal is to stop fishing there, but it s not going to happen this year. Imagine that the organization that controls Atlantic tuna fishing decided to stop all fishing there for a period of ten years beginning in 2014, and that they could enforce this rule with tremendous effectiveness. Based on our experience fishing in class, would this be good or bad for the Atlantic tuna? Explain your answer. (3) 10. Two market-based approaches for addressing greenhouse gas (GHG) emissions are emissions fees and tradable emissions permits. A. One argument frequently made in favor of emissions fees is that the revenues they generate for the government would be a benefit. Is this a valid argument in favor of fees? Explain. (2) B. Some people argue that giving away tradable permits would be inequitable because it would give pollution rights to wealthy utilities. Is this a valid argument against permits? Explain. (2) C. Assuming that permits will be traded in efficient markets, from an efficiency point of view does it matter how permits are initially distributed? Explain. (2) Page 6 of 10

7 11. We talked about a number of ways of valuing the benefits of environmental programs. Among these techniques were the travel cost method (TCM), hedonic property values (HPV), value of a statistical life (VSL) and contingent valuation (CV). A. Which of these techniques should be used to value the benefits of a program that would improve water quality in the Mississippi river? Please explain your answer. (1) B. Which of these techniques should be used to value the benefits of constructing a new velodrome (a track for racing bicycles) in Minnetonka? Explain your answer. (1) C. In your opinion, does a person s VSL increase or decrease as they age? Explain. (1) Page 7 of 10

8 12. Consider a standard supply and demand diagram for some good such as bicycles. In your answers below, show and label all relevant curves, the market quantity and the efficient quantity and the dead weight loss. A. Diagram a negative externality that results from the production of bicycles. (1) B. Why might there be a negative externality associated with production of bicycles? (1) C. Diagram a positive externality associated with the consumption of bicycles. (1) D. Why might there be a positive externality associated with the consumption of bicycles? (1) Page 8 of 10

9 13. Imagine that an environmental regulation will reduce the supply of a particular good, reducing gains from trade in that market. Further, imagine that demand for this good might be relatively elastic (meaning that the demand curve is fairly flat) or relatively inelastic (meaning that the demand curve is fairly steep). Under which condition, elastic demand or inelastic demand, will the environmental regulation be more likely to be defeated in a representative democracy? Explain your answer. (1) 14. Now consider a diagram of the level of emissions into a lake. For the indicated marginal abatement cost (MAC) and marginal damage (MD) curves, please answer the following. Which of the levels indicated in the graph might be optimal and how would you choose between these two or more points that might be optimal? (2) Page 9 of 10

10 15. Imagine that you are trying to value a particular piece of wilderness that people use for recreational hiking and naturist activities. While this area has no entrance fee, statistics have been kept on who visits and how frequently they visit the area. Visitors come from two cities. City A is 10 miles away and has 20,000 residents. They make an average of 8 visits per year. City B is 50 miles away and has 40,000 residents. They make an average of 4 visits per year. The cost of traveling is $0.20 per mile. A. Using the travel cost method, estimate the annual active use value of this area to the people living in these cities. (2) B. List three problems with applying the travel cost method in the real world. (1) Page 10 of 10