ECON 311 Final Exam Spring 2009

Transcription

1 ECON 311: Economics of the Environment Name: Spring 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. Use diagrams with abatement on the horizontal axis to show the cost savings associated with adopting improved abatement technology under the following policy regimes. A. Flexible or changing abatement standard (3) B. A fixed abatement subsidy (3) The net savings is A-B

2 2. Three factories are each emitting eight tons of waste into a lake. The state s pollution control authority would like to cut the total emissions by nine tons. The factories have the following marginal cost of abatement schedules: Tons Abated MC A MC B MC C 1 $1 $2 $4 2 $4 $3 $6 3 $7 $4 $9 4 $10 $5 $13 5 $13 $6 $18 6 $16 $7 $24 7 $19 $8 $31 8 $22 $9 $39 A. One way to reduce emissions by nine tons would be to have each factory reduce emissions by three tons. What would be the total cost of this? (2) = $40 B. What would be the cost of achieving a nine ton reduction in emissions if the pollution control authority used an emission fee to achieve this reduction? Explain your answer. (2) It would be the minimum cost, or = $35 The fees paid are not a cost if everyone has standing, they re just a transfer. C. If fifteen pollution permits were auctioned to the polluters, how many permits would each of the firms purchase? (2) A 6, B 3, C - 6

3 3. In class, we discussed the environmental Kuznets curve. A. Explain what the environmental Kuznets curve is. (1) The environmental Kuznets curve is a U-shaped relationship between environmental quality and economic development or per capita GDP. B. What are three different problems with using the environmental Kuznets curve as a model of the relationship between per capita GDP and environmental quality? (3) First, it s consistent with an industrial model of economic development and may not be appropriate for different development models. Second, it may be that what matters is your per capita GDP compared with your neighbors per capita GDP as you might export your pollution to poorer neighbors. Third, environmental quality has many facets and some (such as wastewater treatment or GHG emissions) don t match the environmental Kuznets curve well.

4 4. In the following diagrams of the cost savings associated with a technological advance under a flexible emission fee, shade in the areas that represent the following A. the reduction in the total fee paid (2) B. the cost saving on abatement that was being done before the technology changed (2)

5 5. In a sentence or two, explain what the equimarginal principle is. (2) Costs are minimized when the marginal cost is equated across sources. 6. There is currently a debate raging about whether greenhouse gas emissions should be regulated through a permit system or through carbon emissions fees. Briefly discuss two advantages of a permit system and two advantages of an emission fee system. (4) A permit system is self-enforcing in that the people regulated by it are also stakeholders. The price of permits will change automatically with inflation, which emissions fees won t. Emissions fees will result in fewer emissions as technology improves. Emissions fees aren t subject to strategic manipulation by market participants.

6 7. The following table presents some environmental data from Australia, Canada, Mexico and Sweden. Use this data to answer the following questions. AUS CAN MEX SWE Emissions SO 2 (kg/cap) NO (kg/cap) CO 2 (tons/cap) Municipal Solid Waste (kg/cap) Nuclear Waste* * Waste from spent fuel arising in nuclear power plants, in tons of heavy metal per million tons of oil equivalent of total primary energy supply. Taken from Field and Field Source: OECD, Selected Environmental Data, A. What is the difference between how Australia generates electricity and how Canada generates electricity and which is more environmentally friendly? (2) Australia burns coal while Canada uses nuclear power. B. Based on the data shown above, which country is more environmentally friendly, Mexico or Sweden? Explain your answer. (2) This is a matter of opinion and depends on how you support your answer.

7 8. We took one lecture to talk specifically about toxic and hazardous stuff. Offer two reasons why toxic and hazardous stuff should be regulated in ways that are different from how more conventional pollutants are regulated. (2) Toxic and hazardous stuff does damage in small quantities, in complicated ways and, potentially, over very long periods of time, all of which make standard regulations largely ineffective. 9. The manufacture of one unit of a toxic substance costs $150. Proper disposal of a unit of this substance costs $100, but the substance may be disposed of improperly, but in a way that the disposer cannot be identified, at a cost of $30 per unit. What is the range of possible values for a subsidy for proper disposal that will encourage proper disposal without encouraging the production of the substance simply for collection of the disposal subsidy? (3) < subsidy < < subsidy < 250

8 10. International environmental agreements are necessarily mutually beneficial. However, any country has a great incentive to let others do the work and free ride without doing any work itself. How are international environmental agreements often structured to prevent free riding? (3) The agreements don t come into effect until a certain core set of countries has ratified it. 11. Rank the six different pollution control regimes that we discussed in terms of the incentives that they offer for the development and adoption of new pollution control technologies. (3) Highest: Flexible Fees Fixed Fees and Fixed Subsidies Fixed Standards Flexible Standards Flexible Subsidies Lowest

9 12. 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 $25 2 $200 $50 3 $300 $75 4 $400 $100 5 $500 $125 Imagine that the price of steers is $510. A. What is the socially optimal or efficient number of steers for the rancher to raise? (3) Four. This is when SMC<P. B. Assume that rancher has the right to raise as many steers as she wants and bears no liability for damage done to the farmer s crops. How can Coasian bargaining lead to the socially optimal outcome? (3) The farmer can bribe the rancher to not raise the fifth cow, offering a payment of between $10 and $125. C. Offer three weaknesses or failures of Coasian bargaining that explain why it is an imperfect solution to our environmental problems. (3) There is a free rider problem if there are many victims. Property rights must be perfectly clear. Damages and costs must be common knowledge.