A. Fixed standard less than optimal. B. Flexible standard less than optimal. C. Fixed emission fee greater than optimal

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1 ECON 311: Economics of the Environment Name: Spring 2008 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. For each of the six pollution control instruments discussed in class, tell me whether the incentives to develop and adopt lower cost abatement technology is greater than, less than or equal to what would be socially optimal. A. Fixed standard less than optimal B. Flexible standard less than optimal C. Fixed emission fee greater than optimal D. Flexible emission fee greater than optimal E. Fixed abatement subsidy greater than optimal F. Flexible abatement subsidy less than optimal Page 1 of 10

2 2. Now, consider technological advances in abatement technology that lower the marginal abatement cost. This is just like question 1 except that now I want you to draw a diagram with abatement on the horizontal axis showing the cost savings to such an advance under each of the following policy types. A. A fixed abatement subsidy. (2) B. A flexible abatement standard. (2) The net savings is A-B Page 2 of 10

3 3. There are a wide variety of policy tools that can be used to control emissions and the related pollution damage. Among these are technology-based standards, emissions fees. abatement subsidies and emissions permits. In class we have talked about the various disadvantages of technology-based, command and control regulations. Despite these disadvantages, command and control approaches remain a popular way to address pollution problems. Offer two explanations for the popularity of these types of approaches. (3) Command and control policies are easy to specify, monitor and enforce. C&C policies are easy to sell politically. 4. 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 Page 3 of 10

4 5. In class, we discussed the environmental Kuznets curve. The environmental Kuznets curve is a U-shaped relationship between environmental quality and per capita GDP and suggests that very poor and very rich countries have good environmental quality while countries with intermediate levels of income per person have relatively poor environmental quality. Offer two criticisms of this idea. Put somewhat differently, what are two 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. 6. One way of producing electricity without the production of greenhouse gases is by using wind turbines. One problem with wind turbines is that they can kill large numbers of birds. Briefly discuss which technique you might use to value this cost of wind turbines and why that technique would be appropriate. (3) Contingent valuation is probably the best if it is just people s non-use existence value of the birds that matters. If people travel to view or to hunt these birds then the travel cost method might be appropriate. Page 4 of 10

5 7. In class we discussed the idea that a pollution control authority might set emissions fees so as to maximize its own revenues rather than to maximize social welfare. However, it seems that tradable permits may be more popular than emissions fees. Imagine that a pollution control authority is going to sell, though some sort of auction, tradable emission permits. It might choose to sell a quantity of permits designed to maximize its revenues from this auction rather than selling the socially optimal quantity of permits. Using the following diagrams, draw in the relevant curves to show the efficient level of emissions or number of permits and the revenue maximizing number of permits. (3) Page 5 of 10

6 8. The presentation in this course made a point of differentiating between more conventional pollutants and hazardous or toxic substances. One reasons for this differentiation is that the appropriate approach to regulating a hazardous or toxic chemical is necessarily different from the approach to regulating other types of pollutants. Offer two different explanations as to why hazardous or toxic substances need to be regulated differently. (3) 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. 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. Page 6 of 10

7 10. For each of the four following diagrams, clearly indicate the efficient (optimal) level of either emissions or abatement. (1 point each) Page 7 of 10

8 11. Three factories are each emitting eight tons of waste into a lake. The factories have the following marginal cost of abatement schedules: Tons Abated MC A MC B MC C 1 $1 $2 $ 6 2 $4 $3 $ 8 3 $7 $4 $10 4 $10 $5 $12 5 $13 $6 $17 6 $16 $7 $23 7 $19 $8 $30 8 $22 $9 $38 Imagine that the goal is to reduce emissions by twelve tons. A. What would be the cost of this reduction if each firm were required to reduce its emissions by an equal amount? (2) =$72 B. What would be the cost of this reduction if it were achieved through a system of tradable permits? (2) The permit price is not a cost of the program if the agency that sells permits has standing =$61 C. If firm B were given twelve tons of tradable emission permits, what would be the equilibrium allocation of these permits? That is, how many permits would each firm wind up with after trading? (2) A 5 B 1 C - 6 Page 8 of 10

9 12. We discussed issues related to implementing environmental regulation at the state versus the federal level. Thinking specifically about issues related to water quality, when should water pollution be regulated at the state level and when should water pollution be regulated at the federal level? Explain briefly. (2) It should be regulated at the state level when the water won t cross a state boundary and at the federal level when it will cross a state boundary. 13. Why is it that as the size of a community increases, the efficient level of provision of public goods increases, other things held constant? (2) Because as population increases the total marginal value increases. Page 9 of 10

10 14. Explain briefly how the cost of reducing greenhouse gas emissions will depend on the regulatory tool that is used to achieve the reduction. (3) Command and control policies tend to be more costly while market based policies tend to be less costly. 15. Imagine that instead of controlling air quality in the classroom through a command and control approach, the University allowed Coasian bargaining. Specifically, imagine that the issue of whether a professor could smoke cigarettes while lecturing was settled through negotiation between the professor and her students. A. If a professor was willing to pay $30 for the right to smoke during a lecture while each student suffered damage of $2 from the professor s smoking, would it be efficient for the professor to smoke? (2) It would be efficient if there were fewer than 15 students. B. If professors were not granted the property right in this case, how would Coasian bargaining work to achieve the efficient result with respect to whether or not the professor smoked while presenting her lecture? (2) Students would collect money to bribe the professor not to smoke if it was efficient for him not to smoke. Page 10 of 10