Final Exam EC3545 Spring, 1998
True False
1. A Kaldor efficient action may be converted to a Pareto efficient action, if the "winners" compensate the "losers." (T--if the B>C, then redistributing the benefits can make everyone better off, or at least indifferent)
2. In the short-run, smaller levels of pollution will result from a subsidy of $X/ton of pollution eliminated as will result from a tax of $X/ton emitted. (F--in the SR, there is the same marginal incentive to clean up a ton of pollution either way)
3. In the long-run, similar levels of pollution will result from a subsidy of $X/ton eliminated as from a tax of $X/ton emitted. (F--in the LR the subsidy makes the polluting industry more profitable, hence there would be entry and greater pollution, than would be the case with the tax in which exit would occur)
4. It was argued in class that the physical effects (soiling, health, etc.) of an environmental improvement are less certain than are the valuations of those effects by economists. (T--huge variation in estimates of physical damages, much smaller plausible variations in valuations of those damages)
5. The policy of "separation of use" is generally more practical for air pollution than for water pollution. (F--rarer opportunities, since in breathing air, we have greater difficulty separating uses than with water)
6. Moral suasion as a policy instrument is more likely to be effective as a short- term remedy than for longer term environmental concerns. (T--people may in crisis times do things with C>B, but unlikely as a sustained activity)
7. Moral suasion as a policy instrument is more likely to be effective when applied to competitive firms than to households. (F--voluntarily increasing costs will be likely to drive the environmentally conscious firms out of business, not a problem for households)
8. Analysis of global environmental problems is made more complex than local or regional problems because of 1) the difference in levels of national environmental concern among nations, and 2) greater uncertainty about how the global ecosystem works as compared to local or regional ecosystems. (T)
9. It is largely carbon dioxide, CO2, which cumulates near ground level creating the "greenhouse effect." (T)
10. In studying total discharges of hydrocarbons to the oceans, it was argued in class that what happens to atmospheric hydrocarbon discharges is of greater importance than intentional or unintentional marine spills. (T)
11. Spatially uniform controls lead to an inefficient distribution of environmental quality when locations differ in MB and MC of cleanup. (T--want controls set so MB=MC, where huge variations exist, particularly for MB)
12. If all externalities were internalized by "socially optimal" controls, individuals in society might finally agree on proper air and water quality levels. (F--probably would maximize disagreement, since about half would want more and half less)
13. Thinking about the (inevitable) trade-offs between environmental goods and other goods is likely to result in better decisions than failure to do so. (T--one of the principle points of the class)
14. The use of dollars in an economic benefit-cost analysis is not a valid reason for widespread dislike by environmentalists of benefits-cost analysis, since the dollars are merely convenient units of account to measure real effects. (T--the dollars merely facilitate transactions involving real things we care about)
15. Economic efficiency is always enhanced by efforts to clean up the environment that have benefits greater than costs, despite the rise in the cost of goods whose production or consumption involves pollution. (T)
16. With uniform controls, one usually expects relatively too much polluting activity to take place urban locations, with too little rural polluting activity. (T--see 11 above)
17. Atmospheric SOX and TSP come mostly from the transportation sector. (F--power plants and industrial processes)
18. Environmental pollution is a very old problem, with many important examples of undesirable environmental conditions prior to the 1970s. (T)
19. Solid wastes are a greater threat to human health than is air pollution or water pollution, but fortunately solid wastes can be readily converted to these less damaging forms. (F--opposite)
20. SOX and TSP have been the principle culprits in the health damages experienced in major air pollution episodes in this century. (T)
21. In class it was argued that the poor must receive larger net benefits than the rich from U.S. environmental policy, since they live in the dirtier parts of urban areas which would receive the greatest clean-up. (F--might pay for clean-up in higher rents, hence land owners benefit)
22. One reason given in class for why hedonic studies might understate the benefits of air quality improvements was that many air pollution damages are not perceived by people. (T)
23. If other "bads" are positively correlated with air pollution, and these bads are omitted from an hedonic equation, then damages from air pollution will be understated by the equation. (F--overstated)
24. A fairly small proportion (less than 10%) of estimated air pollution damages is associated with commercial vegetation damages (e.g. ornamentals). (T--actually a very small proportion)
25. The "sum of specific damages" approach to measuring environmental clean-up benefits assumes zero damage perception by exposed households. (T--otherwise mitigation expenditures would be undertaken and those would not be included properly)
26. A disadvantage of the voting approach to environmental policy is that small numbers of individuals with very great environmental demands cannot impose their will on a majority that is little affected, even when B>C for the policy. (T--this is the central problem with voting, it fails to reflect the intensity of wants)
27. The principle costs associated with environmental policy as practiced in the U.S. has been those associated with moving polluters to where they do less damage. (F--required add-on control devices is principle cost)
28. Salable emissions rights are inefficient since they allow some polluters to continue polluting by merely buying permits from other firms. (F--other firms, those able to clean up at less cost, sell their rights to pollute causing the clean-up to occur at least social cost in terms of foregone other goods)
29. In cases where the Coase Theorem applies, who has the property rights in air, water, "mudsplashes," and so on remains of concern to society despite the fact that the efficient outcome occurs regardless of property rights assignment. (T--we care about the wealth distribution among various people)
30. Ordinary supply and demand analysis results in a quantity of output that yields a higher net benefit to society than any other output level, ignoring any market failures. (T--see S&D graph, look at various output levels)
31. If two mutually exclusive projects had identical NPVs (assuming accurate net benefits in each period and using the same social rate of discount), we may still have strong preferences between them on equity grounds. (T--see 29 above)
32. The presence of private market failure offers the hope that government intervention may improve resource allocation. (T)
33. Economists think pollution is most usefully thought of as a resource allocation problem rather than as a moral/criminal problem. (T--are you evil if you eat too much at a free buffet? Just a missing market problem)
34. Given the great importance of human health damages, it is appropriate to use a two-tiered (primary, secondary) environmental quality standard in which health is considered for the primary standard while material damage, aesthetic concerns, etc. are later taken up by secondary environmental standards. (F--want to compare the *full* marginal benefits with the marginal costs to decide the one best control level)
35. Two mutually exclusive projects, Project X and Project Y, have B/C ratios of 1.4 and 1.1 respectively. Project X must always be adopted on efficiency grounds. (F--might not have highest NPV)
36. Economists favor allowing additional people into a wilderness area as long as the total willingness-to-pay of all users increases with additional people. (T--maximizes human value of the resource)
37. The impact of a policy on total emissions per se is of primary interest to environmental economists; the resulting level of environment quality is less important. (F--environmental quality is what damages humans what they care about, not emissions per se)
38. An disadvantage of the survey/experimental approach ("contingent valuation") is that it may elicit environmental attitudes, but not true willingness-to-pay. (T)
39. An undesirable location to consumers (say, one with dirty air) which is also undesirable to firms would be expected to have higher wages than elsewhere but the effect on rents would be ambiguous. (F--rents down, wages ambiguous)
40. The travel cost method of obtaining demands for environmental goods relies on price variation that stems from different park entrance fees for different customers. (F--fees same usually, relies on different costs at different distances)
41. It was argued in class that the Coase Theorem might best be thought of as a reason for the existence of most environmental problems. (F--reason why there are not more env. problems)
42. Global per capita calorie availability increased between the 1930s and the 1980s. (T)
43. In True State of the Planet it was argued that the risk to humans and wildlife from agrochemicals is far less than the risk of losing wildlife to low yields and the consequent plowing down of more habitat. (T)
44. Today, natural resources are less expensive relative to wages than ever before. (T)
45. Because of increasing exposure to harmful chemicals of industrial/agricultural origin, the last 15 years have seen a small, but steady, decline in life expectancy in the developed countries, due mostly to rapid cancer increases. (F)
46. Only about one-tenth of the earth's terrestrial area remains wilderness. (F)
47. Although the United States has been the world's number one timber producer since World War II, U.S. forests have experienced an increase in volume in the past fifty years and have maintained roughly the same area over the past seventy-five years. (T)
48. Only about half of the timber harvested in the United States, Europe, and Nordic countries comes from second-growth/plantation forests. (F)
49. According to TSOTP 30 percent of agricultural water will need to be transferred from agricultural to urban areas in the western United States to meet urban needs for the next 25 years. (F)
50. Eliminating laws that prevent water marketing and establishing private water rights would give consumers an incentive to waste more water than at present. (F--see Coase notes)
51. The commercial harvest of ocean fisheries peaked in the late 1940s and is currently about half of that peak amount, in overall tonnage. (F)
52. The world-wide problem of overfishing has its source in the system of open access and free use, with only capture confering ownership of the fish. (T)
53. Ambient sulfur dioxide and particulate matter levels in the major cities of the developed world have continued the the decline of earlier decades. (T)
54. Economists discount the benefits and costs that occur in the future because a smaller amount today will cumulate to those future benefits in a world of positive interest rates. (T)
55. "Net Present Value" was argued to be an inferior method of evaluating cash flows since it does not always select the project with the highest B/C ratio or IRR. (F)
SHORT Answer essays: (Answer 9 of the 10 in the space allotted).
1. When evaluating policies that alter the probability of death, how do economists decide how to value the "statistical value of life?" (HINT: how do economists value anything?)
Willingness-to-pay for the change in probability is the appropriate
value to use, since it is other things that must be given up to get that
improvement (and the $ WTP will reflect those foregone goods)
2. The environmental economics course began with a discussion of two very conflicting views (Boomsters and Doomsters) of the role of growing per capita income and of population on future environmental and resource conditions. What were the main arguments on each side of the debate?
Doomsters believe continued growth in income and population will result
in resource depletion and environmental decay.
Boomsters believe continued growth in income will increase the demand
for environmental quality leading to a cleaner world and that greater population
will provide more minds and muscle to solve problems of all kinds, including
environmental problems
3. Air pollution, endangered species, rain forest depletion, over-fishing, the "freshman 15," and the like would seem on the surface to be dissimilar problems. Yet the economist argues that these problems are all related--what key insight links all of these problems and why do we have them?
The "missing market" underlies all of the problems. The missing
market itself stems from a property rights failure...in many cases, it
is technologically difficult to effectively "own" something (e.g. the difference
between land and air; cow/chicken versus whale/elephant).
4. Suppose that a completely accurate benefit analysis (incorporating accurate values attached to all physical effects) concluded that a 10 microgram reduction in air pollution was worth $30 million dollars per year (in ecological and other effects not directly affected by the number of people in the region) plus $20 per person per year in the affected region. If a control policy costing $30 million or less were available that could reduce pollution by one microgram in the region, it should--in terms of efficiency--obviously be applied, regardless of how many people were present to experience the benefits. Suppose, instead, that eliminating 10 micrograms of pollution costs $60 million per year. Question: What is the smallest size of city for which this clean-up effort could be justified on efficiency grounds? (show your work).
Want to know when Benefits would just equal Costs or: $60M = $30M
+ $20(X), where X is the number of people.
Then, subtracting $30M for each side, $30M = $20(X) or X = 1.5 million
people. Amazing how useful grade school algebra can be huh?
5. We talked in class about four psychological demand motivations that underlie value. The one of these that is easiest for economists to measure is "use value." List the other three?
Option Value, Bequest Value, and Preservation Value (note all are progressively
less related to use of the resource)
6. A paper company emits water pollution that damages a privately-owned recreational beach by $50,000 per year. Assuming that the "Coase Theorem" applies to this case, show how the efficient outcome will always occur, under the four possible cost and liability conditions.
Suppose C>B (e.g. costs $100,000 to clean up)--if beach has right to
clean water, the firm will bribe the beach owner with $75,000 to continue
to pollute the beach (both better off, cleanup doesn't occur--as it shouldn't
on efficiency grounds); if the firm had the right to pollute, there is
no bribe by the beach owner that would be large enough to get the firm
to stop polluting, so again the efficient outcome occurs, regardless of
liability.
Suppose B>C (e.g. costs only $10,000 to clean up)--if beach has right
to clean water, the firm will clean up rather than compensate the beach
owner the $50,000, since can cleanup for $10,000; if the firm has the right
to pollute, the beach owner can offer to pay say $30,000 to the firm to
get it to clean up--this offer will be taken, since the firm is $20,000
better off that way. Again, the efficient outcome (this time cleaning
up) occurs, regardless of who has the rights to the water use.
7. Why was it argued in class that salable water rights could lead to "efficient" use of western water? (Hint: first define what an "efficient" action is, then discuss what salable water rights will do.)
Efficient actions are actions having B >or= C (simple story...should
use Pareto here, but not really necessary). Salable water rights
encourage the lower (marginal) value user to sell water to the higher (marginal)
value user until the marginal values are the same (recall the graph in
class--the "equimarginal principle").
8. List as many reasons as you can recall why the ecological doomsday, in which both environmental quality and economic goods spiral downward, might not occur.
(not covered in the semester of Fall, 1999)
9. "If I weatherize my house at a cost of $1,000, the market value of my house will increase by $900. My energy bill will decrease by $80 per year (assume no other positive or negative effects of the weatherization). Since I expect to live in my house for 7 more years, I expect energy savings (properly discounted) of about $400. Therefore, since the total benefits ($1,300) exceed the cost ($1,000), I should weatherize." (HINT: The market value of a house is a "Net Present Value"--what caused it to change?).
False--should not weatherize, since the benefits are double-counted.
The market value increase now represents the net present value of the benefits
of the weather stripping--adding in the $400 double counts the same energy
benefits.
10. Of two mutually exclusive and independent projects, Project A costs $8 million and has a Net Present Value of $50,000 while Project B only costs $2 million and has a NPV of $49,000. Project B should be preferred on efficiency grounds. True, False, or Uncertain (explain your answer).
False--see Rule 3! Intuition: the extra $6 million in expenditure
recovers the opportunity cost of the capital (since that's what it was
discounted with) plus another $1,000--i.e. you're doing better
with the bigger project than with the smaller one.