Economics
309, Midterm Examination, Spring 2002 – Professor Hackett
Name:
_______________KEY__________________
PART
I: Short answer (12 points each). Be sure to respond to each part of each
question. Clearly label your answer to parts (a), (b), (c), etc.
1.
(a) What are the three pillars of a sustainable society, as the phrase is used
in this class? (b) Briefly describe the "inverse U" relationship
between pollutant concentrations and real per-capita GDP? (c) What factors
explain the changes in birth and death rates between stages II and III of the
demographic transition? (d) Based on economics and opportunity cost, why are
total fertility rates inversely related to the education and empowerment of
women?
(a) Economy, Community (or democratic systems/processes),
Environment (or ecosystems)
(b) As per-capita income rises, pollution concentrations first rise,
then later fall.
(c) Birth rates fall due to factors including (i) industrialization
and people moving away from subsistence agriculture where children are valuable
workers, to urban life where children are more of a cost; (ii) advent of public
welfare and pensions displacing children as a source of old-age security; (iii)
increasing opportunity cost associated with child-rearing by women who have
joined the workforce outside the home; (iv) increased access to contraceptives;
(v) culture finally catches up with the reality of lower death rates.
(d) Opportunity cost of child rearing rises when women can
alternatively earn a high income in the workforce outside the home. Also,
educated and empowered women have more control in family planning.
2. (a) Explain why
conventional international development lending programs applied to low-income
non-industrialized societies led to a debt crisis? (b) In what specific ways
(directly and indirectly) did structural adjustment programs undermine human
and natural capital in heavily indebted low-income countries?
(a) Too much money
was dumped into these countries relative to the capacity of the country to
absorb the money in productive projects that would benefit many people. Lack of
democratic systems and processes result in "kleptocratic" governments
that find various ways to siphon development money away from projects, or favor
family-owned businesses with lucrative contracts. Transnational corporations
often cooperated with this process, and provided technical assistance on large
projects. The Wapenhans report indicates that the World Bank did a poor job in
devising projects that would succeed. Those projects that did succeed around
the world resulted in growth in world commodity supplies that depressed prices
and thus undermined repayment capacity.
(b) Direct: SAPs
required countries to reduce spending on health, education, and welfare, thus
impairing human capital. Big development projects like dams, mines, and logging
led to the displacement of many people, many of them indigenous. Indirect:
Expansion of commodity supplies around the world (due to SAPs promoting
expansion of commodity exports to generate foreign exchange for debt repayment)
depressed commodity prices and undermined repayment capacity, requiring
accelerated and unsustainable resource harvest.
3. (a) Provide three
different examples of substitutions or mitigations that involve replacing
depleted natural capital with constructed capital in a manner consistent with
weak-form sustainability. (b) Choose one of these substitutions or mitigations,
and use arguments from strong-form sustainability to question or criticize the
extent to which constructed capital can replace natural capital.
(a) Possible examples include fish
hatcheries, tree plantations, aquaculture operations, sewage treatment plants,
water purification facilities, constructed wetlands.
(b) Example: Tree plantations lack
biodiversity and thus are less resilient to predation by pests and disease,
requiring more herbicide and pesticide inputs. Monoculture also means that tree
plantations cannot provide habitat for plants and animals dependent on other
species of trees to live.
----------------------------- please leave the remainder of this page blank --------------------------------
PART
II: Matching (3 points each). Each of the 16 descriptions on the right has a
single matching word or phrase on the left. There is one word or phrase that
does not have a matching description. Only clear and unambiguous answers can be
marked as correct.
|
Word or Phrase |
Description |
|
a. Consequentialism |
1. _J__ Stage of development with high birth and death rates. |
|
b. Stage IV, demographic
transition |
2. _A__ The core concept that underlies teleological ethical systems. |
|
c. Genuine progress
indicator |
3. _M__ Strong-form indicator that implies there is a sustainability
deficit. |
|
d. Kaldor-Hicks efficient |
4. _O__ Occurs when price is below the competitive market equilibrium
price. |
|
e. Green GDP |
5. _N__ A component of genuine savings that will make genuine savings
larger. |
|
f. High discount rates |
6. _T__ The prices of goods that a country exports rise relative to
the prices of goods that the same country imports. |
|
g. Law of comparative
advantage |
7. _C__ A weak-form sustainability indicator that includes the cost
of crime. |
|
h. Article XX of GATT |
8. _I__ A sustainable development strategy that has a strong track
record for reducing poverty and empowering women in low-income countries. |
|
i. Microcredit |
9. _B__ Stage of development with low birth and death rates. |
|
j. Stage I, demographic
transition |
10. _Q__ A component of genuine savings that will make
genuine savings smaller. |
|
k. Enhancing the
productivity of natural capital |
11. _F__ Result in presented discounted value
calculations assigning a low value to benefits received by future
generations. |
|
l. The dollar value of time
spend volunteering |
12. _H__ States that trade restrictions are allowed under
certain circumstances if they protect exhaustible natural resources and are
nondiscriminatory. |
|
m. Ecological footprint
larger than carrying capacity |
13. _E__ A weak-form sust. indicator that incorporates
measures of natural capital (but not social capital) into a traditional
aggregate economic measure. |
|
n. The dollar value
assigned to growing natural resource stocks (regeneration rates exceed
harvest rates) |
14. _D__ This is efficiency criterion is satisfied
when a policy alternative generates the largest aggregate net benefits to
society, regardless of how benefits and costs are distributed. |
|
o. A shortage (excess
demand) |
15. _K__ A way to
increase carrying capacity. |
|
p. A surplus (excess
supply) |
16. _P__ Occurs when
quantity supplied is larger than quantity demanded. |
|
q. The dollar cost assigned
to pollution harms (emissions exceed what the environment can absorb) |
|
|
r. Pareto efficient |
|
|
s. Stage II, demographic
transition |
|
|
t. Barter terms of trade
increase |
|
|
u. Barter terms of trade
decrease |
|
PART
III. Analysis
Use
the following information for the next two questions (only some of the
information is necessary) about a hypothetical country: The value of
volunteerism is $1 million. The dollar value of GDP is $150 million. The dollar
value of investment spending is $60 million. The dollar value assigned to
declining natural resource stocks (regeneration rates below harvest rates) is
$30 million. The dollar value of family breakdown is $12.2 million. The
ecological footprint per capita exceeds carrying capacity per capita by 35
percent. The dollar cost assigned to pollution harms (emissions larger than
what the environment can absorb) is $8.5 million.
1.
(3 pts) Compute genuine savings. Show your work.
Genuine savings = I - r(R-g) - p(e-d) = $60 mill. - $30 mill. - $8.5
mill. = $21.5 mill.
2.
(3 pts) Is society engaging in enough genuine savings to maintain current
stocks of constructed and natural capital? Yes or no.
No, because genuine savings are less than investment, meaning that
there is insufficient savings to provide for the necessary additional
investment to offset declines in natural capital.
3.
(3 pts) Describe two specific examples of ways that this country might be able
to import carrying capacity from countries with an ecological footprint smaller
than carrying capacity.
Import food.
Export carbon dioxide emissions, garbage, and other wastes to sinks
in other countries.
Import goods like paper, lumber, clothing, automobiles, gasoline,
etc. that are made from the natural resources of other countries.
4.
Computational problem: A publicly traded firm owns a renewable but depletable
natural resource, and is currently harvesting from the resource in such a way
that it is generating a net return of $100,000 per year that can be sustained
"forever." An alternative harvest method that the current board of
directors do not want to use would generate a net return of $500,000 in year 0,
$200,000 in year 1, $100,000 in year 2, and 0 "forever" after (due to
the resource being destroyed). The current price of the firm's stock reflects
the net income of $100,000 from current management practices.
(a)
(4 pts) If the prevailing opportunity cost of capital in financial markets is
0.05 (5 percent), is there a profit incentive for a corporate raider to buy a
controlling interest in the firm at current stock prices and pursue the
alternative harvest method? (hint: the PDV of net revenue from the current
harvest method is equal to $100,000/r, where "r" is the discount
rate. Use the standard method of computing PDV of net revenue for the alternative
harvest method). Show your work.
PDV (current mgmt) = $100,000/0.05 = $2 million.
PDV (alternative mgmt) = $500,000 + $200,000/(1.05)1 +
$100,000/(1.05)2 = $781,179.13
Therefore the answer is NO, because the PDV of the flow of net
return (profit) over time is larger under the current management system at a 5
percent discount rate.
(b)
(3 pts) Repeat your work in part (a) above using an opportunity cost of capital
equal to 0.15 (15 percent). Show your work.
PDV (current mgmt) = $100,000/0.15 = $666,666.67.
PDV (alternative mgmt) = $500,000 + $200,000/(1.15)1 +
$100,000/(1.15)2 = $749,527.40
Therefore the answer is YES, because the PDV of the flow of net
return (profit) over time is larger under the alternative management system at
a 15 percent discount rate. Therefore it is profitable for the corporate raider
to acquire the a controlling interest in the firm (share prices reflect the
value of the firm at $666,666.67 under current management) and then change to
the unsustainable management system and make a net gain of $749,527.50 -
$666,666.67 = $82,860.83