The cost of getting water has fallen, so I will drink more of it.

Transcription

1 ECON 311: Economics of the Environment Name: Spring 2005 Bellas Midterm You have three hours and thirty 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. 0. We ll start out with an easy one. The College of Management just installed a water cooler very near my office. While previously I had to walk across the floor, down the stairs and into another room to get water, now I just need to step out of my office. A. How has this changed the quantity of water I drink while at the office? (1) The cost of getting water has fallen, so I will drink more of it. B. How would total water consumption change if each faculty member had a water cooler in his or her office, assuming that the total number of people on the faculty did not change? (1) Again, as the cost of getting water to drink falls, people will drink more of it. 1. The key to resolving environmental problems is to make people pay for all of the costs of their actions. For purposes of this question, consider the action of driving an automobile in the Minneapolis-St. Paul metropolitan area during the day. Briefly list the costs associated with this action that a driver pays for and those that she doesn t pay for. (2) They pay for gasoline, wear and tear on their cars, their time taken to drive, etc. They don t pay for wear and tear on the roads, air pollution, noise pollution or congestion that they create for other drivers. Page 1 of 1

2 2. My wife and I lived in Bulgaria for a year. Many aspects of life were very different there. Among the differences was how people paid for their utilities such as heat and hot water. A. In some apartment buildings (which is where everyone lived) hot water use was measured only for the building as a whole and the bill was divided equally among the building s occupants. In other buildings, hot water use was measured for each apartment separately and the residents of an apartment had to pay for what they used. A student did some research looking at hot water use under each of these two systems. According to economic theory, what should he have found? (2) He did in fact find that when people split expenses between their building-mates they consumed more hot water because they weren t incurring the full cost of their actions. B. Another utility that was handled differently in Bulgaria was heat. For the most part, heat was provided through steam radiators that were centrally supplied with steam and which individual apartment or office dwellers were unable to control. Offer two reasons why replacing steam radiators with small, portable electric heaters would have reduced the amount of energy used for heating. (2) Portable electric heaters mean that people incur the full cost of their own heating, so they will probably choose to keep rooms cooler. They can choose to only heat the room they are in and not heat unused rooms or unoccupied rooms. There may be certain efficiencies in heating with electricity rather than steam. You had to be sure not to give the same answer twice, which several people did. Page 2 of 2

3 3. Consider a standard supply and demand diagram for some good such as sandwiches. A. Diagram a negative externality that results from the production of sandwiches. (2) B. Diagram a negative externality that results from the consumption of sandwiches. (2) C. Offer a real world example of a good that has an externality associated with its production. (2) Steel production, gasoline production, bread production, beer production and donut production all put things into the air that have external effects. D. Offer a real world example of a good that has an externality associated with its consumption. (2) Gasoline consumption and tobacco consumption can generate air pollution. Page 3 of 3

4 4. To address the problem of a large quantity of automobile traffic and resulting congestion, a city decides to build extra highway lanes. To pay for these extra lanes, the city plans to implement a pay as you drive plan that would charge people a highway use fee based on the amount of driving they do. Once the extra lanes are paid for, the highway use fee will be ended. Explain what is silly about this plan. (2) This is really a duplicate of the question from an older midterm asking about construction costs for a trash incinerator. The fee might reduce use enough to make the new construction (either a trash incinerator or the additional highway lanes) unnecessary, so you could simply impose the fee rather than spend a lot of resources on construction. 5. Consider the following diagram showing the relationship between the level of cleanliness of a lake and the total value of that lake. A. Draw in the associated marginal value curve. Please be careful and clear in your diagram. (2) Page 4 of 4

5 B. Now consider the diagram from the point of view of the level of effluent into a lake. For the indicated marginal damage (MD) and marginal abatement cost (MAC) curves, please indicate which point or points (from A, B, C and D) are or might be optimal and how you would choose between or among them. (2) B or D might be optimal, C or A definitely won t be. The choice between B and D depends on the relative size of areas 1 and 2. If area 1 (the costs incurred going from D to C) is larger than area 2 (benefits gained going from C to B) then D is optimal. If area 2 is larger than area 1 then B is optimal. C. The diagram from part B, on which the horizontal axis is labeled Effluent, is reproduced below. Carefully circle the correct portion of the correct curve that represents downward sloping demand for or marginal value of cleanliness. (2) Page 5 of 5

6 6. An aquifer, an underground body of water, will yield water to anyone who drills a well down to it at zero marginal cost. There are 100 people with historical access to an aquifer, each of whom has the following demand for water (specified by price and quantity demanded in a year): P Q d $7 2 $6 4 $5 6 $4 8 $3 10 $2 12 $0 16 The aquifer currently holds 16,000 units of water and recharges at a rate of 800 units per year. A. If extraction is costless, how long will the water last if access is restricted to the original 100 people? (2) Extraction will be 1600 units per year, for a net drain of 800 per year, meaning that the aquifer would be drained in 20 years. B. How long will the water last if the number of people with access to the water is 200? (2) Extraction will be 3200 units per year, for a net drain of 2400 per year, meaning that the aquifer would be drained in 6.67 years. C. What price for extraction of a unit of water would lead to sustainable use of the aquifer if there are 100 people with access to it and if there are 200 people with access to it? (2) You need to have total consumption be 800 units per year. 100 people, per capita consumption of 8 units, price of $ people, per capita consumption of 4 units, price of $6 D. Imagine that sustainability was to be achieved by restricting the number of people with access to the water rather than by charging people for what they use. What is the largest number of people that would use the water in a sustainable way if there were no way to charge people for their use? (2) 800 units divided by 16 units per person (at zero cost) gives an answer of 50 people. Page 6 of 6

7 7. A well organized population of 1000 mice is addressing the problem of a cat that resides in their building and kills mice. Each mouse has an annual probability of a cat-related death of This probability would be reduced to 0.01 if the mice were able to put a bell on the cat, which would warn them of her presence. The only problem is that the mouse that puts the bell on the cat will die doing so. A. Is it efficient to bell the cat? (2) Yes, because it costs one life and saves 20 per year. No, because it saves statistical lives, which are relatively less valuable, while costing one certain life, which would be relatively more valuable. B. Explain how issues of standing may result in this program not being done. (2) If it is efficient it should be done. However, if each mouse that might bell the cat does the analysis from his own point of view and he or she has standing, the cost will likely be greater than the benefit despite the fact that from the point of view of the entire population of mice the benefits would be greater than the cost. C. What does this have to do with environmental economics? (2) I ll accept most reasonable answer here, but what I was looking for was the idea that the costs of environmental improvements, even those that definitely should be done, are often concentrated on the small group that is responsible for taking the actions that will improve the environment. They will be unlikely to incur the costs for the greater good. Page 7 of 7

8 8. In discussing valuation of benefits of environmental programs, there were four methods that were explicitly mentioned as either indirectly or directly measuring willingness to pay for benefits. They were the travel cost method (TCM), hedonic property valuation (HPV), the value of a statistical life (VSL) and contingent valuation (CV). For each of the programs listed below, indicate which of the four techniques would be appropriate for evaluating benefits. There may be multiple techniques that are appropriate. (4) TCM HPV VSL CV An air quality program that would improve visibility in an area but not X X have any health effects Creation of several neighborhood X X maybe parks within a city A water quality program that would eliminate odorless and tasteless maybe X X carcinogens from drinking water Construction of walls and planting of trees to reduce noise from busy roadways and highways X maybe I generally deducted from four points for either missing one that should have been checked or for checking something that shouldn t have been checked. 9. A public good has a marginal cost of provision of $80,000 per unit. Each person in a city has the following demand for this public good: Q MV Aggregate MV 1 $95 $95,000 2 $85 $85,000 3 $75 $75,000 4 $65 5 $55 6 $45 7 $35 A. In a city of 1,000 people, what is the efficient number of units of this public good? (2) Two units, because the aggregate marginal value of the third unit is less than the marginal cost. B. As the size of the city increases, what happens to the efficient level of provision of a public good, other things held constant? (2) The efficient level of provision increases as population increases because the aggregate MV increases. I generally gave credit for statements about increased cost sharing, but this isn t really correct. Page 8 of 8

9 10. Page 9 of 9