ECON 423: Environmental and Natural Resources Economics

Old Midterm Exams

Economics 423 - Environmental and Natural Resources Economics

Professor Steve Hackett

Spring 1998-Examination #2

Part I: Answer one of the two questions below:


1. Suppose that the Emerald Forest Wilderness is the place where the 7 Power Bar sisters do their outdoor recreation. The Power Bar sisters are septuplets (with identical recreational preferences) who are partners (that share income equally) in a business-each runs a different branch office. The branch offices are of varying distances from the Emerald Forest Wilderness. The table below indicates each sister's travel cost and number of visits to the Emerald Forest Wilderness in 1997:


Sister
$ Travel Cost
Number of Visits in 1997
Alkyone
100
0
Merope
90
1
Kelaino
80
2
Elektra
70
3
Sterope
60
4
Taygete
50
5
Maia
40
7

1.a. Recall that the Power Bar sisters have identical outdoor recreational preferences and income. Thus for each travel cost above, the number of visits made by the sister who actually did that travel can be used to determine the number of visits they would make if they all faced the same travel cost. Use this remarkable fact to fill in the demand schedule below:


$ Travel Cost
Total Number of Visits
100
0
90
7
80
14
70
21
60
28
50
35
40
49

1.b. Use the data in the demand schedule above to draw and carefully label the implied demand curve the Power Bar sisters have for the Emerald Forest Wilderness:


Note: Plot data from the table in 1.a above. Fully label the diagram.

1.c. Use the information you gathered above to compute the net economic value (consumer surplus) that the Power Bar sisters assign to the Emerald Forest Wilderness at a travel cost of $70. Show your work.

Consumer Surplus @ P = $70, Q = 21 = 0.5[30*21] = $315

2. Suppose that there are 10 firms, each of which have historically been emitting 200 tons of particulate matter per year. Suppose further that each firm has the following (constant) marginal abatement cost:

Firm A--$5/ton Firm B--$10/ton Firm C--$15/ton Firm D--$20/ton Firm E--$25/ton Firm F--$30/ton Firm G--$35/ton Firm H--$40/ton Firm I--$45/ton Firm J--$50/ton


2.a. Derive the industry-wide total abatement cost associated with a 50 percent reduction in emissions, assuming each firm must reduce emissions by 100 tons/year and assuming no allowances trading. Show your work.

Total Industry Abatement Cost = $(500 +1000 + 1500 + 2000 + 2500 + 3000 + 3500 + 4000 + 4500 + 5000) = $27,500

2.b. Derive the industry-wide total abatement cost associated with a 50 percent reduction in emissions, assuming each firm is given an allowance to emit 100 tons/year, and that these allowances are fully marketable. Show your work.

Firms A - E each sell 100 allowances to firms F - J @ price around $27.50.

Thus firms A - E each clean up 200 tons Total Industry Abatement Cost = $(1000 + 2000 + 3000 + 4000 + 5000) = $15,000

2.c. Describe conditions under which it might be best to have limited allowances trading and to require all polluters to engage in at least some abatement.

When the pollutant is not uniformly mixed in the air or water, and so concentrations of pollution can occur in localized hot-spots that imply some do not benefit from pollution-control.


Part II: Answer one of the two questions below:


3. Suppose that the City of Arcata has given you (an economic consultant) a $40,000 grant to determine (1) the non-market economic value of the Arcata Marsh and Wildlife Sanctuary (thus not counting the sewage remediation that we already pay for), and (2) the economic impact of visitation to the Arcata Marsh and Wildlife Sanctuary to the Arcata economy. Carefully describe how you would go about determining the answer (1) and (2) above.


(1) I would use the travel cost method for out-of-town visitors, and the contingent valuation method for in-town people. The travel cost method would require construction of a questionnaire that would include distance traveled, mode of travel, percent of travel cost due to visitation to the Marsh, income and educational attainment and gender, and direct travel-related expenditures.


(2) Economic impact to the City of Arcata by visitors to the Marsh is primarily focused on money spent on hotel rooms, restaurant meals, gasoline and other goods or services provided in town. One would then apply the correct multiplier to determine a rough estimate of economic impact. This analysis leaves out the impact of the Marsh on quality of life, which could be determined in part by way of a hedonic regression analysis of the element of residential real estate prices attributable to closer proximity to the Marsh.

4.a. Describe why firms might participate in a voluntary pollution prevention program such as 33/50 or Green Lights.

  • As an alternative to image advertising.
  • To save energy costs and reduce waste disposal costs.
  • To develop a reputation with the EPA.
  • To prevent more stringent regulation being imposed.
  • To enhance perceived product quality among environmentally concerned consumers, or consumers wishing to save energy costs.

4.b. What conditions are most likely to lead to voluntary pollution prevention programs generating meaningful pollution controls?

  • When consumers can distinguish between true pollution prevention and "greenwash."
  • When consumers can reward firms with good reputations, and punish firms with poor reputations. In other words, when reputations are valuable to firms.
  • When consumers are concerned about the environment and well-informed.
  • When some independent and neutral organization people trust can audit performance.

4.c. If a firm can save $100,000 by being out of compliance with environmental regulations, if the probability of detection is 65 percent, and if the probability of sanction given detection is 80 percent, what is the minimum $ sanction that will be sufficient to deter out-of-compliance behavior?

0.65*0.80*X = $100,000

X = $100,000/.52 = $192,308.