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Prof. Hackett, Humboldt State University, Spring 1997 Midterm Examination Part I. Definitions (20 total points, 2 for each
definition) -- Define or briefly characterize each Economics: Studies
how scarce resources are allocated among competing ends. Scarcity: Occurs when,
at a zero price, more is wanted than is available. Opportunity Cost: In
the context of choice, the value of the next best alternative.
Macroeconomics: The
study of economic aggregates, traditionally focusing on consumption,
production, prices, and employment, with special attention to the
business cycle. Gross Domestic Product:
The total dollar value of the final goods and services produced
in an economy in a given year. Capital (general): Productive
stocks which yield a flow of benefits over time. Generally includes
productive stocks in the categories of created, human, nantural,
cultural, and social capital. Discount Rate: The
rate at which increasingly distant costs or payments shrink in present
value; in financial markets, the risk-adjusted opportunity cost
of per unit of capital. Ecological Tax Reform:
The process of public finance reform which calls for lowering
taxes on productive or neutral activities such as employment or
earnings, which at the same time placing or raising taxes on the
generation of pollution and on the depletion of resource stocks.
Weak-Form Sustainability:
The theoretical foundation is characterized by economic models
and measures, and the assumption that the focus of analysis is on
the sum of the various five capitals; allows for substitution of
declining stocks of natural capital with human or created capital.
Strong-Form Sustainability:
The theoretical foundation is characterized by ecological models
and measures, and the assumption that the focus of analysis is on
each of the five classes of capital; allows for only very limited
substitution for declining stocks of natural capital. Part II. Short Answer (60 total
points; 10 for each question; answer any 6 of the 7 below; I will
penalize for LONG answers…..) 1. Sustainability can be thought of as a community's preservation and prudent use of the "5 capitals" in order to generate a sustained flow of benefits, broadly categorized as the "3 pillars." i. Name and briefly describe the 5 capitals.
Natural: The stock of biomass, ecosystems, natural resources, biodiversity, and energy and mineral resources Human-made: The stock of tools, factories, computers, infrastructures and networks, technologies, as well as things like farms and ranches. Human: The stock of human skills, capabilities, energies, abilities, training. Cultural: The stock of shared elements of myths, life-ways, arts, values, spiritual systems. Social: The stock of civic virtues, shared norms
of reciprocation, gift-sharing, volunteerism, mutual aid, and engagement
in commuity and public issues. Group problem-solving skills. ii. Name and briefly describe the 3 pillars.
Economic Vitality: A system that coordinates the
production and consumption of quality goods and services which meets
basic human needs, enhances the quality of human life, and rewards
creativity and enterprise. Ecological Integrity: The biodiversity, complexity,
and productivity of the web of live has not been compromised. Democratic Process: Norms of equality of access
and participation in social, political, legal, and economic systems;
systems which feature shared recognition of fundamental human rights,
and which seek a balance between protecting the well-being of all
people and the rewarding of enterprise, creativity, and effort. 2. The principle of comparative advantage is a central
underpinning of the argument that trade, including international
trade, improves the material welfare of society, and thus may enhance
sustainability. i. Briefly describe the principle of comparative
advantage. At various levels (individuals, communities, regions
or countries), trade based on comparative advantage occurs when
entities specialize in those activities where they have a productivity
advantage relative to the other trading parties. ii. If person A can produce 10 loaves of bread or
1 set of clothes per day, while person B can produce 2 loaves of
bread or 4 sets of clothes, determine each person's comparative
advantage. Show how trade increases the total amount that A and
B together can produce. If each were like Robinson Crusoe (before Friday
showed up to do his work) and engaged in no trade, then the work
day would be divided (say in half) between the two activities, yielding
6 loaves and 2.5 sets of clothes each day. If A traded bread for
some of B's clothes and each ultimately specialized, then for the
same work day they would together produce 10 loaves and 4 sets of
clothes. Time to shorten the work day! 3. Critics of "free international trade"
do not disagree with the principle of comparative advantage in theory,
but argue that a particular aspect of the modern international economy
can invalidate this principle in practice. What, specifically, is
the particular aspect of the modern international economy that can
invalidate the principle of comparative advantage. If comparative advantage is based on various countries'
traditional industries, then capital mobility (the ability to relocate
entire industries) can obviously undermine this form of comparative
advantage. If people are less mobile, then comparative advantage
may be more based on human skill, technology, social and political
institutions, and location. 4. Critics of "free international trade"
argue from a number of points that the way we conduct international
trade today undermines sustainability. i. Briefly outline the different ways that
high-income country/low-income country trade can erode sustainability.
-Low income people place higher utility on a $1,
out of necessity, than do richer people. This difference can lead
to low-income people being willing to accept the trash, toxics,
and dirty industries of the wealtheri countries. -People in rich countries are more likely to have
"purchased" environmental quality through activities such
as more rigorous regulation of pollution and resource harvest. Thus
harvest of raw resource commodities to satisfy the high levels of
consumption in rich countries is shifted to the lower-income countries.
With less rigorously enforced controls on resource harvests, the
possibility of unsustainable harvest in lower income countries may
increase as a consequence of trade. ii. If some countries inadequately define and enforce
state, common, or private property rights to commercially valuable
natural resources relative to others, briefly describe the
pattern of trade, and briefly outline how trade between these
countries can lead to unsustainable harvest of these natural resource
commodities. As stated above, people in rich countries are
more likely to have "purchased" environmental quality
through activities such as more rigorous regulation of pollution
and resource harvest. Thus harvest of raw resource commodities to
satisfy the high levels of consumption in rich countries is shifted
to the lower-income countries. With less rigorously enforced controls
on resource harvests, the possibility of unsustainable harvest in
lower income countries may increase as a consequence of trade. 5. Briefly outline how securing property rights/land
tenure directly affects food security, and can indirectly affect
the extent to which those who work the land have incentive to make
costly (in effort, time, or money) investments such as tree planting
or terracing that enhance the environment. Relate these direct and
indirect effects to sustainability. More secure and stable property rights/land tenure
systems give farmers and others who harvest from the land a longer
time horizon over which they can repay investments in more sustainable
forms of farming and harvest, in building erosion control, in planting
trees. 6. Briefly explain how education and empowerment
of women and other less enfranchised people both directly and indirectly
enhances sustainability. Direct: education and empowerment directly enhances democratic process, one of the three pillars. Indirect: education and empowerment is associated
with reduced fertility rates, higher earnings and thus reduced rates
of poverty, among others. 7. Briefly outline why traditional international
development assistance programs led in many cases to an erosion
of sustainability. Failed development projects in developing countries
led to a repayment crisis for loans provided largely by big financial
center banks. SAL/SAP programs were pushed on those with repayment
problems. Loans were linked to political and economic "liberalization"
programs of privatizing government-owned industries, relaxation
of minimum wages and other subsidies, reductions in social spending,
and realignment of production toward resource exports. Lower resource
prices pressured countries to increase harvest rates to unsustainable
levels. Part III: Computational Analysis (20 points) -
Answer one of the following
two questions: 1. Discounting and Sustainability. Hypothetical Example:
Cost Savings from Purchasing a more Fuel-Efficient Furnace
1a. Determine which of the two options - 80 or
90 percent efficient furnace - generates the smallest present discounted
value of (installation + operating) cost over the five year time
horizon given above, when the discount rate is 10 percent. Show
your work (attached scratch paper is ok). PDV of Cost Savings = -$18, implying that the
90 percent efficient furnace does not pay for itself (after discounting)
over the five-year horizon. Dynamically cost efficient option is _________80%__________
1b. Briefly discuss the relationship between
discount rates and the market viability of costly current investments
that generate benefits far into the future. Higher discount rates mean that projects that
yield benefits in the future become less financially viable relative
to projects that yield more immediate benefits. Sustainability requires
that the well-being of people in the future are not compromised
for the interests of the present. 2. Genuine Savings. Consider the following highly
simplified example, and compute Genuine Savings: I = $10,000 R = 2000 g = 500 r = $2 p = $3 e = 1000 d = 500 Where I = investment in human and human-made capital,
R = annual harvest quantity of a generalized natural resource, g
= quantity of regrowth of generalized natural resource, r = estimated
$ value per unit of generalized natural resource being harvested,
p = estimated $ cost per unit of pollution being generated, e =
quantity of human-caused emissions (such as sulfur dioxide), d =
earth's capacity to assimilate human-caused emissions. Compute Genuine Savings. Show your work. GS = I - r(R-g) - p(e-d) Genuine Savings = $__5500________ |