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Economics 309 Semester Examination, Professor Hackett, Spring 2006

Take-home exam (Due in class on Tuesday 04 April). You are to work alone on this exam. You may not seek out assistance from another person. Receiving assistance from another person on this exam constitutes academic dishonesty, and will result in you receiving 0 points for this exam. By turning in your answers to this exam, you acknowledge that you understand these conditions, and pledge that as an honorable person all work that you turn in is your own.

Your name: _______________________________

Answer any three of the following six questions. Your answers must be word-processed. Be sure to enumerate and briefly summarize the question first, so I know which question you are responding to. Each question, and each part of each question, has equal weight. Be thorough, be sophisticated, answer all parts of the questions you select, and use good writing skills. Give ideas their fair chance, and leave out personal opinions and clichés.

1. One of the fundamental challenges associated with moving toward a more sustainable society is to develop widespread support for a sustainability ethic that articulates a set of shared values to guide social policy. (a) Do some research and find an authoritative, scholarly article, book, or description of a sustainability ethic not used in class. Summarize the main elements of this ethic in a paragraph, followed by a complete scholarly citation to the source. (b) Below that material, briefly identify the deontological and/or teleological elements of this ethic you have summarized. (c) Below that material, briefly relate this ethic to our working definition of sustainability in class. [Grading: Authoritative source, quality of writing, clear indication of sustainability content in ethic, sophisticated interpretation of elements and in relation to working definition].

2. Important questions have been raised about the ability of market systems to move us toward a more sustainable society. In this question you are asked to demonstrate a sophisticated understanding of the pros and cons of this issue. (a) Pros: Briefly and succinctly lay out the “pro” argument. Your argument should address the role of the price system in well-functioning, competitive markets and how it shapes the behavior of consumers, firms, and markets for alternatives. It should also address the role of information, third-party certifications, and firms’ reputations. (b) Cons: Next, briefly and succinctly lay out the “con” argument. Your argument should include the “real-world” validity of the assumptions underlying a well-functioning competitive markets, and implications for the functioning of the price system in shaping the behavior of consumers, firms, and markets for alternatives. It should also address non-marketed aspects of the world that are important to sustainability, profit-maximization and the incentive to externalize costs, the effects of product advertising, the influence of discount rates in financial markets, and so forth. [Grading: Quality of writing, number of elements to pro and con argument, sophisticated understanding of economics in the context of sustainability]

3. It is useful to know how to use analytical tools to evaluate sustainable energy projects. Your Auntie Mae is building a new house. She is considering installing a solar hot water heater. You have done a cost analysis for her. The up-front total cost (system, parts, installation), net of all tax credits or rebates, is $7000

Estimated annual energy cost savings:

Years from present time	Est. annual energy cost savings ($)
Year 1	400
Year 2	428
Year 3	458
Year 4	490
Year 5	524
Year 6	561
Year 7	600
Year 8	642
Year 9	687
Year 10	735
Year 11	787
Year 12	842
Year 13	901
Year 14	964
Year 15	1031
Year 16	1104
Year 17	1181
Year 18	1264
Year 19	1352
Year 20	1447

(a) Put these numbers in an Excel sheet and derive net present value for 4%, 6%, 8%, and 10% discount rates, and derive internal rate of return for this investment. Attach your Excel sheet with your name on it to this exam. (b) Provide a brief, succinct economic analysis of this project for Auntie Mae. For this analysis, do some research and document the current rate of return that Auntie Mae could alternatively receive if she invested $7000 in a long-term certificate of deposit, in a money market fund, or in a leading stock mutual fund. Is this solar hot water heater competitive with these alternative investments? Relate your internal rate of return to these alternative returns. Make a brief convincing argument one way or the other and back it up with research. Qualify your argument with a brief explanation of the difficulties of forecasting future energy prices and other limitations of your analysis. (c) Extra credit (5 points): Using Excel (attach the sheet), determine whether NPV would be even higher if Auntie Mae included the $7000 up-front cost in the 20 year mortgage she is getting for the house, at a 6.5 percent mortgage interest rate, and at the 25 percent tax bracket (for the mortgage interest deduction). [Grading: Correct Excel analysis; high quality, documented research on returns from alternative investments; high quality writing and a sophisticated use of economics in your narrative]

4. Important questions have been raised about the extent to which international trade in the present context, which generates substantial aggregate material gains, is actually consistent with moving toward sustainability. (a) What are the impacts of agricultural subsidies in the US and Western Europe on the sustainability of agriculturally-based communities in lower-income countries? (b) Trade agreements are designed to reduce tariff and non-tariff trade barriers to promote freer trade. To what extent do these agreements currently undermine the ability of member countries to impose social, labor, and environmental standards on imports, including government-sponsored ecolabel programs? Be very specific, and support your argument by citing recent trade dispute cases and trade negotiations. (c) Provide a few examples of how a breakdown of property rights and/or a failure of democratic process in a lower-income country trading with higher-income countries can accelerate environmental harm or resource depletion. [Grading: Quality of writing, sophistication and quality of economic and other elements of analysis, completeness of coverage, use of authoritative sources]

5. Efforts at making international development more sustainable have resulted in the Millennium Development Goals (MDG’s). But how well are we doing in meeting these goals worldwide? (a) Go to http://unstats.un.org/unsd/mi/pdf/MDG%20Chart%20Sept.pdf and research the issue. Briefly summarize how major regions of the world are doing in meeting each of the eight MDG’s and associated targets. (b) Go to http://unstats.un.org/unsd/mi/mi.asp and look up El Salvador. Using the indicators provided, describe El Salvador’s progress toward the MDG’s and associated targets. (c) Do some additional research, briefly summarize El Salvador’s history, and determine El Salvador’s most critical development needs and briefly describe them in the context of sustainability. [Grading: Quality of writing, sophistication and quality of economic and other sustainability elements of analysis, quality of research, completeness of coverage]

6. Unlike traditional societies around the world, most rich industrialized countries are open societies in which residents are free to migrate from one community to the next based on economic, quality of life, or a myriad of other factors. In this context many of the design principles developed by Ostrom for successful local governance of common pool resources are difficult to implement, and the property rights to community quality of life factors may be essentially open-access in nature. The challenge of sustainable local economic development in rich industrialized societies involves a balance of economic, community, and environmental goals in a technologically and demographically changing landscape that features stakeholders with sharply different goals. (a) In the context given above, what specific economic development policies could you suggest to a local jurisdiction (city, county) that would help it move towards sustainability (your policies must be legal, reasonably feasible for communities with modest resources, and fall within the jurisdiction’s scope of authority)? Relate each to aspects of our working definition of sustainability. (b) Some of the most desirable communities have the least affordable housing, or experience so much growth that the original desirable attributes are destroyed. What can jurisdictions do to address this issue and still stay on track toward sustainability? [Grading: Quality of writing, thoroughness and extent of policies described, understanding of economic development in the context of sustainability, overall sophistication of response].