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Old Midterm ExamsEconomics 423 Environmental and Natural Resources Economics Professor Steven C. Hackett Humboldt State University, Spring 2000 Second Mid-term Examination (correct answers in red) Part I. Matching (17 matches, 2 points each):
Part II. True/False (4 questions, 4 points each) Embedding bias in contingent valuation studies refers to the problem that stated values only relate to active recreational use, and thus understate non-market environmental value by omitting passive uses such as option, bequest, and existence values. T or F. A major advantage of the travel cost method over the contingent valuation method is that the dollar votes people cast in traveling to the recreational resource are actual (though perhaps difficult to measure), while the stated values expressed in conti ngent valuation studies are hypothetical. T or F. Most recent available data suggests that the costs of environmental protection regulation in the U.S. represent approximately 1.8 percent of gross domestic product. T or F. Suppose that gasoline stations in a small city sell a gallon of gas for $2, and have average variable costs per gallon of gas of $1.80. Before the law was passed requiring double-lined tanks, each station had $50,000 per year in fixed costs. After the law was passed, each station had $250,000 per year in fixed costs. If price remains at $2, and people in that city buy 2.5 million gallons per year of gasoline at $2, then environmental regulation caused an increase in market concentration the maximum num ber of gasoline stations that the city can support has declined from 5 to 1, thus creating a monopoly. T or F.
Part III. True/False (4 questions, 4 points each) In the negotiation over the Montreal Protocol for the control of greenhouse gases, the British firm ICI played a pivotal role by joining environmental groups, and opposing DuPont, in calling for a complete ban on production of halocarbons such as freon by industrialized countries. T or F. Stiglerian environmental regulation is inherently unstable because benefits generated by the regulation are spread thinly across many, each of whom have little incentive to spend resources participating in the policy process. In contrast, the costs of environmental regulation are concentrated on a few, each of whom has a strong incentive to spend resources participating in the policy process. T or F. Firms have an incentive to lobby to impose costly environmental regulation on their own industry if by doing so they raise their rivalsÕ costs more than their own. T or F. Public choice theory starts from the premise that politicians are motivated by serving the public interest, even when doing so may cost them power, reelection, or future income. T or F.
Part IV. True/False (4 questions, 4 points each) Suppose that an expected profit maximizing firm can save $2 million each year by being out of compliance with environmental or resource management regulations. If the mandatory penalty is $5 million for being out of compliance, and if courts are 100 percent likely to impose this penalty, then the minimum probability of detection necessary to generate deterrence is 20 percent. T or F. In order for reputation to function as a deterrent to pollution or resource degradation, consumers must be well-informed, must care about the environment, must have access to satisfactory substitute products, and the firm must care about itÕs image and about itÕs future sales. T or F. The EPAÕs 33/50 program was set up to get 33 percent of all chemical manufacturing companies to voluntarily develop a comprehensive environmental management system by 1992, and to get 50 percent of all such companies to have a functioning environmental management system in place by 1995. T or F. A key advantage of prison terms over fines or monetary penalties is that prison terms for executive environmental offenders cannot be passed along to consumers, deducted from a companyÕs taxes, or covered by a companyÕs insurance policy. T or F.
Part V. Marketable Pollution Allowances Problem (3 questions, 6 points each) Suppose there are three firms emitting a uniformly mixed pollutant into an airshed, and new regulations require that emissions be reduced by one-half, thereby allowing each to emit only half of its past emissions. Firm X has a constant marginal abateme nt cost of $200/ton, and its past emissions were 200 tons/year. Firm Y has a constant marginal abatement cost of $400, and its past emissions were 100 tons/year. Firm Z has a constant marginal abatement cost of $600, and its past emissions were 300 tons/y ear. (a) Compute the annual pollution abatement and control costs in this industry without marketable pollution allowances. Show your work. (200 x 100) + ($400 x 50) + ($600 x 150) = $130,000.
(b) Compute the annual pollution abatement and control costs in this industry with fully marketable pollution allowances. Show your work. Firms X and Y sell all their allowances to firm Z, and thus X and Y do all the cleanup. Therefore total cleanup costs are: ($200 x 200) + ($400 x 100) = $80,000 (Note: The total cost to firm Z from purchasing allowances is not a part of the total industry cleanup cost because it is simply a transfer of revenue to firms X and Y--the revenue gains to firms X and Y fully offset the cost to firm Z of the allowance s transfer). (c) What are the cost savings from fully marketable allowances trading? Show your work. $130,000 - $80,000 = $50,000 |