Quiz 2, Economics 423, Fall 2007 (Prof. Hackett)

Name: Answer Key

Part I: True/False (8 points each)

1. True or false (circle one): If a job is similar to many others but (i) involves an annual risk of premature death on the job that is 0.0002 (2 per 10,000) higher, and (ii) pays a wage premium of $600 per year, then based on this data, the value of a statistical life is $6 million.

2. True or false (circle one): In an individual quota system fishermen are each given a share of total allowable catch, which results in a race for fish or derby due to the rule of capture externality, and promotes overcapitalization.

3. True or false (circle one): In the case of scarce nonrenewable natural resources, all else equal the higher the discount rate the more rapidly the price of the resource rises over time, and the more rapidly the quantity of the resource allocated to each future period declines over time.

4. True or false (circle one): The contingent valuation method is the only way that economists have developed to measure the non-use value (e.g., existence value) of non-marketed aspects of the environment, like marbled murrelet habitat, so that these values can be included in a benefit/cost analysis.

5. True or false (circle one): The travel cost method is a way of measuring the foregone net revenues from timber harvest, or the direct cost of pollution-control devises required by environmental regulation.

6. True or false (circle one): Adam Smith coined the phrase Tragedy of the Commons, which refers to depletion of privately owned resources due to overuse or excessive harvest rates by the private owner.

7. True or false (circle one): A common-pool resource has the characteristics of rivalry in consumption (subtractability) and difficulty in excluding multiple appropriators, while common property is an ownership regime in which a group of proprietors collectively govern a natural or constructed resource, as described by Elinor Ostrom.

8. True or false (circle one): The 2006 California Energy Commission study found that the total cost of requiring fish ladders exceeded the total cost of dam removal on the Klamath basin hydroelectric dams.

9. True or false (circle one): At a level of pollution reduction where total benefits equal total cost, we know that total net benefit is maximized, implying we are Kaldor-Hicks efficient.

10. True or false (circle one): An example of a direct cost of compliance would be the money spent on smokestack scrubbers on coal-fired power plants.

Part II: Diagrams and Short Answer (10 points each)

1. In the space provided below, carefully draw a fully-labeled diagram showing the Gordon model (or, for students attending the 4^th unit lab, the model of steady-state bioeconomic equilibria) showing the open access and the group optimal equilibrium outcomes for a marine fishery. Be sure to label all of your lines and curves.

See diagram in textbook.

2. Suppose the State of California is conducting a strategic plan for the Sinkyone Wilderness State Park, and is considering the option of permitting commercial timber harvest and gravel mining in areas adjacent to popular campgrounds as a way of raising revenues. For the economic component of an Environmental Impact Statement, (i) briefly list (in bullet format) below only those economic methods that could appropriately be used to quantify the economic costs that this activity will impose on current and potential future recreational use, and (ii) describe what each would specifically measure.

· Travel cost method (TCM)

· Contingent valuation method (CVM)

TCM can be used to measure current use value of the area in its present state

A visitor survey could then be used to determine how visitation would be adversely affected by the extractive activity, and then use the TCM results above to identify the foregone value of active use of the site.

CVM could be used to survey non-users to determine their “option value” associated with the option of future use, and what those potential future users might be willing to pay to state parks in the form of taxes (as an alternative source of revenues) to prevent the damage from occurring and maintaining the wilderness setting.