ECON 423: Environmental and Natural Resources Economics

Old Midterm Exams

Economics 423 -- Environmental and Natural Resources Economics

Quiz 1, Spring 1997 (Prof. Hackett)

Please provide the very best answers to each of the questions given below. Good luck!

  1. Definitions (15 points):

Economics: The Study of how scarce resources, goods, and services are allocated among competing ends.

Scarcity: The condition that exists when, at a zero price, amount demanded exceeds available supply.

Opportunity Cost: When choices are ranked and the most preferred alternative is taken, the opportunity cost is the value of the next highest ranked alternative.

Negative Externality: An uncompensated harm such as pollution that is a byproduct of production and consumption activity.

Social Cost: the sum of private and external costs; the full cost of an activity.

2. Value Systems and Economic Systems (20 points):

  1. In an open society made up of people holding diverse values, briefly explain why it is so difficult to use deontological ethics as the base for evaluating the economics of social policy.

In a society with diverse values, the question of what constitutes intrinsic rightness of action, or how we rank actions by their intrinsic rightness, has no universal answer.





  1. If an open society made up of people holding diverse values is more likely to use utilitarianism as the base for evaluating the economics of social policy, briefly but comprehensively list the categories of utilitarianism's shortcomings.
  1. The ends justify the means. Thus actions judged to be morally wrong based on a shared deontological standard may nevertheless be taken as ethical under utilitarianism as long as the ends are sufficiently desirable.
  2. Tyranny of the majority. Utilitarianism can be used to generate benefits for the many at the cost of harms to the few.






  1. How does market capitalism answer the three fundamental economic questions?

i. What to produce: Answered by consumer demand in markets.

ii. How to produce: Choice of production technology is based on minimizing private costs.

iii. For whom to produce: Goods and services flow to those consumers with the dollar votes.

3. The Economics of Market Allocation (20 points):

  1. List the conditions required for a well-functioning, competitive market (your answer should not include "equilibrium" or 'efficient").

Many buyers and sellers, each of whom is small in size relative to the overall market.

Each seller produces similar products.

Buyers and sellers are well informed of prices, qualities, locations, and availabilities.

The transaction costs of exchange are low.

There is a market institution that facilitates and governs trade.

Private property rights are established and enforced.

Buyers and sellers are unable to collude.

There are no externalities.









  1. What does it mean to say that a well-functioning competitive market in equilibrium is efficient?

It means that there are neither shortages nor surpluses, and that the gains from trade are maximized.











4. Supply and Demand Analysis and Externalities (20 points)

Hypothetical Supply and Demand Schedule Data for Cases of candy bars

$ Price Quantity Supplied Quantity Demanded
1 70 90
2 80 80
3 90 70
4 100 60
5 110 50
6 120 40
7 130 30
8 140 20
9 150 10
10 160 0

a. Determine the equilibrium price and quantity of candy in this hypothetical example of a competitive market using the information in the table above: Price = $ __2____ Quantity = ___80___

b. Suppose candy production generates pollution, and a Pigouvian tax of $2 per case of candy is imposed on producers. What is the new equilibrium price and quantity? Price = $___3___ Quantity = ___70___





5. Analysis of Externalities (25 points)






diagram here









a. Using the information in the Figure immediately above, determine the competitive market equilibrium quantity and price assuming that profit-maximizing firms can emit negative externalities.

Q = ___2000___ Price = $__10____

b. Using the information in the Figure immediately above, determine the competitive market equilibrium quantity and price assuming that a Pigouvian tax causes firms to internalize the full social cost of production.

Q = __1000____ Price = $__17____

  1. Using the information in the Figure immediately above, determine the dollar estimate of the total external cost that is caused when firms can freely pollute.

Total external cost = $__20,000_______

d. If the cost of shifting to an emissions-free production technology is more expensive than the Pigouvian tax, then the Pigouvian tax will cause overall emissions to decline by ___50_____ %.