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1 Name: Last 4 digits of UIN: An Aggie does not lie, cheat, or steal or tolerate those who do. I agree with the Aggie Honor Code and pledge to respect it during this examination. Signature (optional) Environmental and Resource Economics, AGEC 350 Fall 2013 Midterm Exam (with grading rubric and selected answers) 100 points You are allowed one 3 5 inch notecard with handwritten notes on both sides. 1. RAT Repeat. The figure below presents the marginal cost curves for two firms that are going to be required to reduce pollution (i.e., abate their pollution). $/unit 5 Firm A $/unit 5 Firm B MC A MC B Pollution Aba tement Pollution Abate ment a. What is the cost effective way to abate a total of 10 units of pollution? Abatement by Firm A Abatement by Firm B 1.a 2A = 10, B = 0 b. How much total pollution would the two firms abate if a tax of $2/unit was imposed? 1.b 40 c. What subsidy per pound would induce the firms to abate a total of 25 units? 1.c $1.50 d. Suppose that a cap and trade policy is used in which each firm is initially required to abate 10 units of pollution. Would trading take place? If not, why not? If so, which firm would buy pollution rights so that it can abate less, and which firm would sell rights, requiring it to abate more? 1.d Yes trading would take place Firm A would sell rights and abate more, Firm B would buy rights and abate less /10

2 Last 4 digits of your ID #: 2 2. RAT Repeat: The figure below is essentially a reproduction of Figure 3.1 in the text. It presents the marginal benefits and marginal costs to society of protecting a river. a. (2 points) Using letters from the graph, what are the net benefits to society if 6 miles are protected? 2.a LRK minus RTU or LUQO KTQO. (1 point if LRK) b. (2 points) Using letters from the graph what is the marginal net benefit of the 6 th mile? 2.b About $1.50 or negative TU (1 point if negative is not indicated). c. (2 points) Using letters from the graph, what is the marginal cost of the 4 th mile? 2.c SN or about $4.50 /6 3. For the two types of value indicated below (i) give one example of how this type of benefit is provided by the environment of the Texas A&M campus, (ii) state a valuation method that could be used to estimate this value, and (iii) indicate one or two key pieces of data that you would need to gather in order to carry out such an estimation. a. (8 points) Nonextractive Use Value 3.a Is the example a correct application of this type of value? /3 Does the method proposed make sense for this example & this value? (probably a revealed preference) /3 Are the data identified appropriate for the value and method? / (typically prices &/or behavior) b. (8 points) Existence Value 3.b Is the example a correct application of this type of value? /3 Does the method proposed make sense for this example & this value? /3 Are the data identified appropriate for the value and method? / 4. The table below presents the number of trips taken by members of the Blue Lake Fishing Club during the fishing season. Members who live close to the lake tend to fish more than those who live far away. Distance Round trip travel Trips taken City from lake cost per trip $ per season Redville 7 miles $2 10 Greenville 12 miles $3 8 Orangeville 19 miles $6 6 Pinkville 26 miles $10 4 Brownville 48 miles $14 2 a. (6 points) Using the travel-cost method, draw a graph in which you represent the demand for fishing trips by a club member. (Be sure to label your axes).

3 Last 4 digits of your ID #: 3 4.a Axes: trips & $/trip Downward sloping line /1 Starts at ($14, 2) and falls to ($2, 10) All other points are correct with line connecting them /1 /6 b. (6 points) How much surplus is enjoyed by a club member who lives in Pinkville? You should indicate it on the graph and provide a rough numerical estimate of the value of this surplus. 4.b Area on graph should be a triangle (perhaps cut off at the top) Triangle should be below the demand curve and above $10 Numerical approximation is $10 and $16 /6 c. (7 points) Suppose that a farm spills hog manure into the lake, causing many of the fish to die. As a result, the number of trips by all members of the club falls by 50%. On your graph, show the cost to a fisherman living in Orangeville in terms of the surplus lost. 4.c There should be new demand curve, or at least part of one /1 The demand curve should have start at $14 & 1 and be twice as steep An area between the curves should be indicated The area should be above $6 /7 5. The figure below represents the marginal willingness to pay of someone who values the existence of an endangered bird. There are 4 people in this community and all of them have exactly the same preferences with regard to the bird. answer a. If bird protection can be purchased for $4 per bird, what is the largest number of birds that economic theory would predict that the people together would be willing to purchase if each individual is acting alone? Any individual would pay for, at most, the protection of 200 birds. No one would pay for the 201 st bird Total protection would be 200 birds / b. What would be the socially optimal number of birds protected if bird protection cost $4 per bird? 350 birds (partial credit if some evidence that they knew to vertically sum the MWTP curves) /

4 Last 4 digits of your ID #: 4 c. If the socially optimal level found in b is different from the privately provided number in a, which characteristic of efficient property rights is not satisfied leading to this inefficiency. If the socially optimal level found in b is the same as the privately provided number in a, then state the three characteristics of efficient property rights. If not equivalent exclusivity must be mentioned Partial credit for mention of nonrivalry (without exclusivity) If a & b are the same, 1 point for each characteristic: transferability, enforceability, exclusivity Clippings Questions Based on clipping on last page. You may remove that page and refer to it when answering these questions Where appropriate, be sure that your answers uses specific evidence from the article. 6. (10 points) Imagine that you are an economist hired by the American Lung Association to argue that new regulations on ground-level ozone are needed in order to achieve a socially efficient outcome. Write a short paragraph summarizing why the oil and gas industry will not make socially efficient choices with regard to the pollutant without some form of government intervention or collective action. 6 Does the answer show that the student understands the idea of an externality? Does the answer show that in the presence of an externality, the market will not achieve the socially efficient outcome. Is the answer clearly written with appropriate evidence from the article. /10 7. Do you believe that the regulation proposed in the article will be cost-effective? a. (5 points) Explain what is meant by a cost-effective policy. 7.a Does the answer show understanding of cost-effectiveness: the policy goal is achieved at lowest possible cost. Only partial credit for reference to 2 nd equimarginal principle without mentioning aggregate costs. /5 /5 b. (10 points) Using evidence from the article, explain why you believe the policy would or would not be cost-effective. 7.b Does the answer talk about different costs of abatement? /3 Is it clear that marginal costs are being considered, not total costs? Is strong evidence from the article provided (e.g. older plants or maybe something involving lifestyle changes. ) /3 Is the answer clearly written with appropriate evidence from the article. /10 8. Suppose that instead of a regulatory approach, the TCEQ would like to consider two other options: (A) giving the rights to the firms, but facilitating bargaining between the firms and those suffering from the pollution and (B) a liability provision to make polluters pay the medical costs that arise because of the pollution. a. (6 points) Do you think these policies would lead to a more efficient outcome than the regulation? Why or why not? 8.a Are arguments made that, in theory, option A could lead to a socially /3

5 Last 4 digits of your ID #: 5 efficient outcome because the public would be WTP the firm to get it to reduce its pollution. Are arguments made that, in theory, B could lead to a socially efficient outcome since the firm will increase its pollution as long at the MNB>the external cost, for which it is now liable. /3 /6 b. (6 points) Which of these two policies do you think is more likely to reduce pollution in a way that is cost effective? (There is no right answer, make an argument and back it up with as much evidence as possible). 8.b Does the argument make valid points (e.g. transaction costs or political acceptability) Is the answer clearly written with appropriate evidence from the article. /6 Clipping Based on In Texas, Resistance Over Stricter U.S. Smog Limits By James C. McKinley Jr., February 3, 2010, New York Times. HOUSTON Environmentalists squared off against business groups and Texas state officials on Thursday at a hearing on a proposal to tighten standards for smog-producing pollutants. The change could improve the health of millions, but would impose burdensome costs on industry and local governments. The new standards, which would reduce the acceptable level of ground-level ozone to from 60 to 70 parts per billion are strongly opposed by the oil and gas industry and the state s politicians, who have been generally unwilling to crack down on polluters if it means sacrificing jobs. The members of the Texas Commission on Environmental Quality (TCEQ) have made it plain they will fight the stricter standards and have called them arbitrary, unnecessary and unachievable. Michael Honeycutt, the director of toxicology for the Texas commission, questioned the evidence that a higher level of ozone is linked to more hospital admissions for lung problems. Mr. Honeycutt also declared that no ruling would fly in Texas if it required people to drive less or change their daily habits. Programs that require lifestyle changes are unacceptable to the public, he said. The proposed lower standards also drew fire from manufacturers and oil and gas companies, who fear they will bear the brunt of the costs of cutting down the volatile organic compounds and nitrogen oxides that cause smog. A spokeswoman for the Texas Oil and Gas Association, said that some refineries are old and cannot adapt to the new goals. They ll have no choice but to close their doors, and that will cost jobs and tax revenues that will hurt the state s economy. Environmentalists and health groups, on the other hand, generally applaud the proposed rule, pointing out that the federal government has steadily tightened air quality standards for decades without slowing economic growth. Historically, the benefits of cleaning up outweigh the costs three to one, said Janice Nolen, of the American Lung Association.

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