Final EC3545 Fall, 2002

True False (assume question relates to U.S., unless indicated otherwise; 1 pt each; NOTE: if any part of the question is false, the entire question is false)

1. __ __ Lomborg argues that population will stabilize at slightly more than 22 billion people by 2050.

2. __ __ "Rationality" (individuals behaving in ways that make them better off) requires that individuals pursue activities up to the point where expected marginal benefits exceeds expected marginal costs by the largest amount.

3 ___ ___ Economists, in benefit-cost analysis, believe that benefits and costs should be discounted and added up, and if the net present value of the benefits is greater than the net present value of the costs the project should be conducted, on efficiency grounds.

4. __ __ The traditional goal of the economist is to have resources allocated so as to provide the amount of environmental goods that would be supplied by a perfectly competitive market, if it could exist for such goods.

5. __ __ On average the developing countries per capita calorie intake has risen over the past ten years.

6. __ __While incomes have increased a great deal in the developed countries, this is somewhat misleading, in terms of welfare, because the income gains have been accompanied by substantial increases in hours of work over the past 120 years.

7. __ __U.S. emissions of all of the criteria pollutants have increased, most notably nitrogen dioxide, over the past three decades.

8. __ __ Fish farm production is an increasing percentage of total fish consumed.

9. __ __ Forest area, as a percent of total land area, has declined from about 60% to about 25-30% over the past 50 years.

10. __ __ Because of the (unpriced) scarcity value of fish, there is too much fishing from each boat and there are too many boats.

11. __ __ Since 1950 annual oil production has grown, on average, at a faster rate than the growth in known oil resources.

12. __ __ The dominant approach on to environmental policy in the U.S. has been the use of economic incentives, such as salable emissions rights or pollution taxes.

13. __ __ Nuclear energy now supplies almost 40% of global energy production.

14 __ __ Environmental trade-offs (costs and benefits) are inevitable results of any decision (including the decision to do nothing) whether we choose to think about them explicitly or not.

15. __ __ The Sum-of-Specific damages approach to valuing environmental improvements will work best if the causes of damage and variations over space in pollution are unknown to those damaged.

16. __ __ Globally, agriculture and industry together use about half of available fresh water, leaving the other almost 50% for household use.

17. __ __ Even when dollar benefits exceed dollar costs of a particular policy, it is still possible that we could be making society worse off by adopting that policy, since the distribution of the benefits and costs matters.

18. __ __ Proper valuation of the environmental benefits that are captured by hedonic methods require that the labor market and land market be considered together.

19. __ __ If environmental controls placed on firms are optimal, their market prices will not be expected to rise.

20.__ __ Benefit-cost analysis weights the preferences of each individual according to willingness-to-pay; hence everyone does not have an "equal say."

22.__ __ Despite large increases in output (income), population, and vehicle miles traveled in the U.S. in the past 30 years, overall emission levels have decreased and air quality has improved in the U.S.

23.__ __ Project A has a B/C ratio of 2.5, while Project B has a B/C ratio of 1.7. On efficiency grounds, Project A must always be preferred to Project B.

24.__ __ Coase argued that, regardless of transactions costs, the assignment of the property rights in a resource has an impact on whether the efficient outcome occurs, namely that there will be more pollution if a firm has the right to pollute than if that right is assigned to households.

25.__ __ Lomborg argues that the entire solid waste of the U.S. economy, allowing for expected growth in population and waste generated per person over the next hundred years, would cover to a depth of 100 feet slightly more than one-half of the area of Colorado.

26. __ __ Economists’ definition of environmental problems ("uncompensated spillovers") is always a subset (less inclusive) than the definition of biologists/environmentalists.

27. __ __ It was argued in class that rising incomes in the developing countries, for whatever reason (including wealth generated via trade), would generally result ultimately in improved environmental and labor conditions in those countries.

28. __ __ Since Lomborg argues (assume rightly, for purposes of this question) that most environmental measures are improving, it must be the case that we are getting the correct relative amounts of environmental and other goods.

29. __ __ Economists are often at odds with environmentalists because the focus of economists is on improvements in the material well being of people (GDP being a good measure of that), regardless of the environmental degradation that might occur.

30. __ __ Most government programs have benefits exceeding costs for everyone, hence are Pareto-efficient, while in the private sector one party is usually harmed when the other benefits from a trade, hence such transactions are Kaldor-efficient.

SHORT Answer essays: (five points each; answer 10 of 11; CROSS-OUT ONE!)
Note: I have deleted the spaces allowed to answer the questions, to preserve paper when printing these sample tests.

1. Compared to other "average locations" you would expect to observe what relative wage and rent affects for a location that was:
a. nice for consumers and bad for firms
b. nice for firms and bad for consumers
c. bad for consumers but good for firms
d. good for both consumers and firms
e good for consumers and neutral for firms

2. "It is mankind’s greed that is causing the depletion of the world’s fisheries!" True, False, or Uncertain—explain your answer. [Hint: we discussed fishermen and their boats in class and made two key arguments, both stemming from a fundamental problem, the usual problem that we have focused on all semester!].

3. The economic incentive approach (salable emissions rights or pollution taxes for example) to environmental clean-up discussed in class (the SOx example) resulted in lower costs for a given level of emissions. Explain why that was the case (HINT: first define "costs," then describe why costs are lower under the incentive approach).

4. We discussed the ivory ban in some detail in class: a) Under what circumstances might a consumer boycott of products made from endangered species be a "good" policy (improve the odds of saving the species from extinction)? b) Under what circumstances would such a policy be undesirable for the goal of saving a species?

5. List and briefly describe (enough that I know that you know what happens in each box) the five elements of interdisciplinary environmental analysis (the 5-Box diagram)

6. "Water should be allocated to those who are most deserving and should not be allowed to be resold, because the water would then end up in the hands of the rich." True, False, or Uncertain—explain your answer. [HINT: discuss equity and efficiency].

7. In class Graves argued that international trade raises the real income (welfare) of people for both imports and exports in all nations, rich or poor. In words only, discuss why this is so.

8. You are in charge of determining how many people get to use an environmental resource (e.g. a wilderness area). You are under great pressure by environmentalists and by economists to take stances that differ in broadly defined ways. What you would attempt to do, compared to doing nothing, if you wanted to: a) please the economists? b) please the environmentalists?

9. The Coase Theorem makes a statement regarding property rights, transactions costs, and efficiency. Write out the Coase Theorem and give a numerical example of how it works, under the conditions in which it will work.

10. In class we discussed the Doomsters and the Boomsters. What would a typical person in each group argue about the impact of population, income and technology.

11. Describe in some detail the 4 methods for ranking projects that have benefits and costs extending over many periods.

ANSWERS:
1) F  2) F  3) T  4) T  5) T  6) F  7) F  8) T  9) F  10) T  11) F  12) F  13) F  14) T  15) T  16) F  17) T  18) T  19) F  20) T  22) T  23) F  24) F  25) F  26) F  27) T  28) F  29) F  30) F
Short Answer:
1. a. W down, R ambiguous.
   b.  W up, R ambiguous.
   c.  W up, R ambiguous (same as b.!).
   d.  R up, W ambiguous.
   e.  R up, W down.
2. False...it is a "missing market" problem--nobody owns the fish and charges a scarcity value for them.  Greed is there for chickens, pigs, and cows, but they aren't going extinct because their scarcity value is charged by their owners...a value that would rise if there were a smaller number of animals relative to demand.  There will be too many boats and each will fish too much, because the failure to charge the scarcity value results in greater (short run) profit, and lowers the apparent marginal cost to the fisherman.
3. Costs are the foregone benefits that come from using society's resources in a particular way...we want to get the things we desire at least cost because we can have more that way.  The economic incentive approach creates incentives for the least-cost of clean-up firms to do the clean-up (since they will sell their rights to pollute to the high-cost firms or will clean up rather than pay a tax that the high cost firms would pay).
4. a. if a country or region (e.g. East Africa) has no effective property rights over the endangered species, a ban on export and a consumer boycott, might reduce poaching, hence keep elephants, etc., from going extinct.  There are long run problems, however, if the elephant is a pest, eating the food of the poor, for example.
   b. if a country or region (e.g. South Africa) does have effective property rights, it will want the elephants to be as valuable as possible to generate revenue for the "owners," the villagers who benefit from sale of tusks, etc.
5. See class notes...repeated over and over!
6. False, on efficiency grounds. Voluntary trade has to make everybody better off--preventing resale might keep the water in the hands of the poor, but they will be worse off!  On equity grounds, since equity is in the eyes of the beholder, anything goes--one could argue (not too convincingly in my opinion) that the decision-maker allocating the water has an interest in keeping it in the hands of those they allocate it to.
7. The easiest way to see this is to recognize that country boundaries are fundamentally artificial--international trade is no different than trade within a country.  The seller must be better off or they would not sell, while the buyer, too, must be better off or they would not buy...hence, whether buying or selling (importing or exporting) any observed trade must improve the welfare of the--voluntary--participants.
8. a. To please the economists you would want to maximize the aggregate benefit of the resource to the human users of it.  You would continue to increase the number of people you allowed in, as long as the benefits received by the marginal person exceeded (or equalled) the aggregate damage that person imposes on the utility of other users.  b. You would be likely, in pleasing the environmentalist, to want to further restrict the use of the resource...perhaps to have a higher environmental experience for those getting to use it, perhaps to keep it more pristine, with a concern for preservation of the resource taking precedence over human use.
9. If transactions costs are sufficiently small, the efficient outcome will occur regardless of how the property rights to a resource are assigned.  That is, in the environmental context, if the benefits are greater than the costs of cleanup, that cleanup will occur regardless of whether the firm has the right to pollute or not (e.g. if damages are $75,000 and cleanup costs are $25,000, those damaged will either sue or bribe the polluter, depending on who has rights).  Similarly, if the costs are greater than the benefits of cleanup, that cleanup will not occur regardless of whether the firm has the right to pollute or not (e.g. if damages are $75,000 and costs of cleanup are $125,000 the firm will not cleanup, compensating those damaged, if the firm is liable for those damages).
10.  The Doomsters believe that growing population and income will increase the throughput of an economy, resulting in eventually polluting ourselves to death or running out of critical resources.  Technology is viewed with suspicion, typically, as it may bring to people previously unknown hazards (e.g. nuclear energy, certain chemicals).  The Boomsters believe that growing population increases the labor and minds to solve resource and environmental problems as they emerge and that growing income will increase the demand for environmental quality, since it is a normal or superior good.  And, more people mean that there will be more damages from any given polluting source, hence greater benefits of cleanup.  Boomsters tend to view technology favorably as it offers the potential to solve emerging problems...indeed the profitability associated with solving environmental and resource problems renders it likely that technology will solve those problems, rather than that being a matter of mere luck.
11. See the handouts for more details.  NPV (net present value) discounts all benefits and costs back to the present (or net benefits in each period, which is equivalent) with the decision rule being that if the NPV is greater than or equal to zero, the project should be pursued (and the highest NPV project should be chosen, among exclusive projects, and when budget constrained).  Benefit-Cost ratios are created by forming the ratio of the net present value of the benefits to the net present value of the costs, with the decision rule being that if the ratio is greater than or equal to one, the project should be pursued (this will sometimes rank projects wrongly, for exclusive projects).  The Internal Rate of Return solves for the rate of return that makes the net present benefit equal to zero, with the decision rule being to pursue projects with a higher internal rate of return than the opportunity cost of the funds (again, this will sometimes wrongly rank projects, for exclusive projects).  The final method of ranking projects is the Payback Period, which ranks projects according to how quickly the funds used to pursue it are paid back to the decision-maker...it has the potential to rank projects very badly under certain fairly common patterns of returns.