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Old Midterm ExamsEconomics 423 - Environmental and Natural Resources Economics - Professor Steve Hackett - Spring 1997 - Quiz 2
Each question below has equal weight (100/6 or 16.67 points each). Good luck!
1. Consider a non-renewable natural resource for which marginal extraction cost is constant and does not change appreciably from one year to the next. Suppose further that the demand for this resource is the same each year. a. Describe Hotelling's Rule for dynamically efficient allocation
of the resource over time. Your answer should employ an equation
and a brief explanation. -Hotelling's Rule states that under the conditions given above, the resource will be efficiently allocated over time ("dynamically efficient") when PDV(p-mc) is equal across the various time periods under analysis.
b. If the resource's price in the scenario above was $100 in 1996 and $50 in 1997, can these prices be dynamically efficient? Briefly explain why or why not. -No, unless we have a large negative discount rate, or a sudden increase in known stocks, or the breakdown of a resource cartel.
2. Suppose that the supply of a commercial natural resource commodity shrinks. Outline how the resulting change in the resource's price affects current consumption of the resource, consumption of substitutes, the price of substitutes, and research on alternatives.
-Price rises and current consumption falls because the supply curve shifts inward to the left. -Rise in price causes some to switch to substitutes, increasing the demand for the substitute and raising quantity consumed and price of the substitute (in the sort run). -Rise in price and quantity consumed makes the substitute more
profitable, motivating entry by new suppliers of the substitute,
and also motivating cost-reducing R&D.
a. List the key shortcomings of benefit/cost analysis and very
briefly explain each of them. -Fairness, ethics, and spirituality values are not commensurable with those things whose value can be measured using a money metric. Thus strict benefit/cost analysis ignores these incommensurable values. -Benefit/cost analysis may be essentially impossible to comprehensively conduct because of the complexity of ecological systems. -Regardless of how we do it, there are ethical problems associated with assigning a monetary value to human lives saved by improving environmental quality. -The effects of current actions on future generations are given very small weights when we apply market-based discount rates to determine dynamically efficient policy options. -Monetization implicitly assumes that $1 generates the same "utility" to a billionaire and a family living in poverty.
b. When total net benefits are maximized, what do we know about (i) (total benefit - total cost) and (ii) (marginal benefit - marginal cost)?
-(total benefit-total cost) is maximized -(marginal benefit-marginal cost) is zero
c. Briefly describe the circumstances under which it is best to use the Travel Cost Method, and the circumstances under which it is best use the Contingent Valuation Method. Briefly explain your answer.
-TCM: measures travel costs borne by those who actively use an area, and so the TCM is best for those resources whose primary value is thought to be active use, such as recreational river access.
a. Briefly compare and contrast the Public Interest theory of
politics versus the Public Choice/Capture theory of politics. -Public Interest Theory: Politicians select those policies that they believe are in the best interests of the public. -Public Choice/Capture Theory: Politicians are self-interested maximizers who select policies that best serve their personal interests (which may include reelection or fat revolving-door deals).
b. What are the key distinguishing characteristics of "Stiglerian" versus "Olsonian" regulatory situations? Briefly offer a real-world example of each.
-Stiglerian: At least some benefits of regulation are concentrated, creating an incentive for some to spend resources to promote regulation. In contrast, costs are more diffuse, implying that opponents have less incentive to spend resources to fight regulation. Montreal protocol.
-Olsonian: Opposite of Stiglerian; costs of regulation are concentrated,
giving opponents of regulation an incentive to spend resources to
fight it. Benefits are more diffuse, implying advocates have less
incentive to spend resources to fight for regulation. Greenhouse
gas controls.
a. Suppose that in any given year a firm can save $10,000,000
by being out of compliance with environmental regulation. Suppose
further that the probability of the firm being caught is 70 percent,
and the probability of the firm being sanctioned if caught is also
70 percent. What is the smallest fine that will still create deterrence?
Show your work. (.7)(.7)X = $10,000,000 X = $10,000,000/.49 = $20,408,163. b. Briefly describe the scope of citizen lawsuits enabled under
the 1990 Clean Air Act amendments. -Sue for cash penalties, which go to support enforcement. -Sue to force compliance.
6. Briefly explain how marketable pollution allowances can lead to lower industry compliance costs relative to command-and-control regulation. By how much will industry compliance costs fall if all firms have the same marginal abatement costs?
-Firms with lower marginal abatement costs sell allowances to
firms with higher marginal abatement costs, leading to more of the
overall industry-wide cleanup effort being done by firms with lower
marginal abatements costs. Thus overall cleanup costs are reduced. -If all firms had the same marginal abatement costs, there would
be no "gains from trade" to motivate the purchase or sale
of allowances. Thus no market for allowances, and no change in overall
compliance costs. |