Midterm 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 16 billion people by 2100.

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

3. __ __ Economists believe that the environmental preferences that humans have for other species should not be included in benefit-cost analysis.

4. __ __ Economists believe that some preferences are better than others, hence should carry more weight in environmental analysis.

5. __ __ 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.

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

7. __ __ While life expectancy has increased a great deal in the developed countries, it has declined slightly in the past 50 years in the developing countries.

8. __ __ We have lost more topsoil than has been created over the last couple of hundred years.

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

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

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

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

13. __ __The dominant approach on to environmental policy in the U.S. has been required add-on control devices.

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

15. __ __Lomborg argues that it is unlikely that we will face significant future mineral resource limitations on growth.

16. __ __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 perfectly known to people.

17. __ __Globally, agriculture and industry together use just over 60% of available fresh water, leaving about 40% for households.

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

19. __ __Proper valuation of the environmental benefits that are captured by hedonic methods can be done in either the labor market or the land market separately.

20. __ __Optimal environmental controls may cause the prices of many goods to rise.

21.__ __ The EPA has established National Air Quality Standards for the 23 so-called "criteria pollutants."

22.__ __ Because output (income) doubled, population has increased by more than 30%, and vehicle miles traveled have more than doubled in the past 30 years, emission levels have increased and air quality has deteriorated in the U.S.

23.__ __ Lomborg argues that there is very little correlation between an area’s acid rain pollution levels and forest damage.

24.__ __ Lomborg argues that the costly Exxon Valdez cleanup effort (pressure-washing the coast) probably did more to harm the natureal environment than to repair it.

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-fourth of the area of Oklahoma.

SHORT Answer essays: (five points each; answer 7 of 8; CROSS-OUT ONE!)
Note: I have deleted spaces between questions to reduce paper printing costs.

1. As was discussed in class, from an economist’s perspective, environmental quality could be getting better, yet could be perceived as getting worse. Explain how that could be.

2. Fact: cancer-related deaths from all causes increased from 331,000 in 1970 to approximately 521,000 in 1992. Does this information suggest that we are in the midst of a cancer epidemic? (Explain)

3. Define a "public good" and give an example of one; then, explain why the market fails to produce the correct amount of such goods.

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. Why is it important to include atmospheric modelers (for air) and hydrologists (for water) in the analysis of policies attempting to deal with air and water pollution?

6. In the discussion of property value approaches to valuing environmental quality, it was argued that benefits might be either overstated or understated, depending on which of two biases dominated. Restricting your discussion to the property value approach, what were the arguments for a) overstated environmental values, and b) understated values?

7. Water "shortages" share an important trait with other environmental problems. What is that trait and why does it make natural variations in rainfall more troublesome? (Hint: water shortages are "like" the Freshman 10Bhow?)

8. In class, Graves argued that the traditional way of determining marginal values for public goods (adding up, vertically, the marginal willingness-to-pay of all individuals benefiting from the public good, at a given income) is flawed. Why did he argue that this method would undervalue the environment and other public goods?

Answers:
T-F:
1) F  2) T  3) F  4) F  5) T  6) F  7) F  8) T  9) T  10) F  11) T  12) F  13) T  14) F  15) T  16) F  17) F  18) T  19) F  20) T  21) F  22) F  23) T  24) T  25) F
Short Answer:
1) Growth in income raises demand for environmental quality at least in proportion to income growth (income elasticity greater than one).  Also, recent monitoring advances allow economic incentive approaches to environmental clean-up that are much less expensive.  Moreover, the income that goes ungenerated because individuals cannot "buy" environmental quality like they can ordinary goods has grown.  All three factors would suggest that the roughly 1/3 improvement in U.S. air quality over the past 30 years might be substantially less improvement than desired.  Since everything is relative in economics, we might feel worse off for this reason--farther from an optimum--despite limited progress.
2) No--there have been substantial increases in population during this period, so the cancer rate might be lower.  An additional important consideration is that life expectancy has grown over the period, and if you live long enough you usually will die of cancer.  To make relevant comparisons, one would need to use age-adjusted cancer rates.  With the exception of cancers related to smoking or sun exposure, age-adjusted cancer deaths are decreasing.
3) A public good is one that is a) non-rivalrous in consumption, and b) non-excludable in consumption.  Examples: the light from a lighthouse, a saved species, air quality in some circumstances, etc.  The market fails to produce the correct amounts because consumers cannot be prevented from using the good, if it is produced, without paying.  Hence revenue will be difficult or impossible to obtain to offset the costs of provision.
4) a) An ivory ban might be (temporarily) a good idea if effective property rights in the ownership of the elephants are not extant--by lowering the value of the ivory, in combination with strong penalties for poaching, the incentive to poach is reduced.  b) If there are effective property rights over elephants, we want them to be as valuable as possible to make them worth caring for and preserving--an ivory ban in this case would lower their value, and since they eat vast amounts of villager food and can do great additional damage, they would not be preserved but rather would be destroyed by poor villagers.  If they are valuable, they can be "harvested" to pay for school books, clean water, or electricity for the villages owning them.
5) It matters greatly where the air or water gets cleaner, because there is large variation in the concentration of damage receptors over space and time.  Atmospheric modelers and hydrologists can provide information about how environmental quality will improve in different locations (on grids or reaches) as a result of a policy initiative; this information can then be used to calculate benefits of clean-up, the latter depending on the number and importance of damage receptors (people and the things we care for).
6) a) property value studies overstate environmental benefits (damage reduction) when variables (e.g. graffiti, poor lighting, cracked sidewalks, abandoned buildings, etc.) that are positively correlated with pollution are omitted from the estimating equation.  Their omission means that the included pollution variable will capture the effects of the omitted variable (times the correlation with pollution).  b) property value studies would understate environmental benefits (damage reduction) if either damages, or which locations are clean or dirty are unperceived.
7) Water shortages, like any shortage, stem from marginal water prices that are too low (the "missing market").  A price that is too low encourages overuse and waste (as with the zero marginal charge for food in the dorms vis-a-vis the case where charges are paid for each serving of food).
8) There is a parallel input market for public goods that is concommittant with the well recognized free rider problem for public good output markets.  We work to get the things we want...if generating income by working does not allow us to get what we want, we will not work.  Moreover, all of that ungenerated income (apart from so-called general equilibrium effects) would have been spent on the public good.
NOTE: I forgot on this exam to ask many questions about the 5-Box diagram...that was an over-sight and is unlikely to be repeated!