Econ 3545 Environmental Economics, University of Colorado, Fall 1998

Instructor: Vijaya Sharma, Ph.D.

Final (Dec 12, 1998)

The test is worth 40 points. Attempt all 28 questions. Each question carries equal weight. GOOD LUCK !

Multiple Choice Questions (each question is worth 1 point)

1. The efficient level of emissions

a. substantially reduces the amount of pollution in air.

b. maximizes profit of a firm from production and sales of its products.

c. balances marginal damages and marginal abatement costs of pollution.

d. is the maximum level of pollution allowed by the pollution control authority.

2. In Figure 1, MAC₁ and MAC₂ denote two alternative pollution-abatement technologies available to a firm and MD is the marginal damage curve. Which level of emissions would be considered the efficient level of emissions?

a. e₀ b. e₁ c. e₂ d. e₃

3. In Figure 1, MAC₁ and MAC₂ denote two alternative pollution-abatement technologies available to a firm. If e₁ is the emission standard (the level of maximum emissions allowed), which abatement technology should the firm use to become cost effective?

a. MAC₁

b. MAC₂

c. Whichever: MAC₁ or MAC₂

d. MAC₂ up to level e₂ and MAC₁ for further emission reduction

4. In Figure 1, MAC₁ and MAC₂ denote two alternative pollution-abatement technologies available to a firm. If e₂ is the emission standard (the level of maximum emissions allowed), which abatement technology should the firm use to become cost effective?

a. MAC₁

b. MAC₂

c. Whichever: MAC₁ or MAC₂

d. MAC₂ up to level e₂ and MAC₁ for further emission reduction

5. Uniform technology standards

a. are cost effective in achieving a targeted level of emission reduction in an industry, and they provide incentives for innovation of improved methods of abating pollution.

b. are cost effective in achieving a targeted level of emission reduction in an industry, but they provide no incentives for innovation of improved methods of abating pollution.

c. are not cost effective in achieving a targeted level of emission reduction in an industry, but they provide incentives for innovation of improved methods of abating pollution.

d. are not cost effective in achieving a targeted level of emission reduction in an industry, and they do not provide incentives for innovation of abating pollution.

6. Uniform emission standards

a. are cost effective in achieving a targeted level of emission reduction in an industry, and they provide incentives for innovation of improved methods of abating pollution.

b. are cost effective in achieving a targeted level of emission reduction in an industry, but they provide no incentives for innovation of improved methods of abating pollution.

c. are not cost effective in achieving a targeted level of emission reduction in an industry, but they provide incentives for innovation of improved methods of abating pollution.

d. are not cost effective in achieving a targeted level of emission reduction in an industry, and they do not provide incentives for innovation of abating pollution.

7. Uniform emission charges

a. are cost effective in achieving a targeted level of emission reduction in an industry, and they provide incentives for innovation of improved methods of abating pollution.

b. are cost effective in achieving a targeted level of emission reduction in an industry, but they provide no incentives for innovation of improved methods of abating pollution.

c. are not cost effective in achieving a targeted level of emission reduction in an industry, but they provide incentives for innovation of improved methods of abating pollution.

d. are not cost effective in achieving a targeted level of emission reduction in an industry, and they do not provide incentives for innovation of abating pollution.

8. Tradable discharge permits

a. are cost effective in achieving a targeted level of emission reduction in an industry, and they provide incentives for innovation of improved methods of abating pollution.

b. are cost effective in achieving a targeted level of emission reduction in an industry, but they provide no incentives for innovation of improved methods of abating pollution.

c. are not cost effective in achieving a targeted level of emission reduction in an industry, but they provide incentives for innovation of improved methods of abating pollution.

d. are not cost effective in achieving a targeted level of emission reduction in an industry, and they do not provide incentives for innovation of abating pollution.

9. Which of the following is correct?

a. To achieve a targeted level of emission through emission charges, you need to have information on marginal abatement cost. You can achieve that targeted level of emissions through a tradable discharge permit system, without information on marginal abatement cost.

b. If there is a continuous technological development in the industry, permit system would lead to the same total level of emissions. Emission charges would lead to lower total level of emissions.

c. Both a and b are correct.

d. None of the above is correct.

10. Which of the following methods would you use to estimate nonuse values of natural resources?

a. Wage rate differentials method

b. Property value differentials method

c. Contingent valuation method

d. Any one of the above methods would work.

11. Which of the following is correct?

a. Cost effectiveness implies efficiency.

b. Efficiency implies cost effectiveness.

c. Both a and b are correct.

d. None of the above is correct.

12. In a benefit-cost analysis,

a. transfers, such as payment of taxes, are excluded.

b. social opportunity costs, instead of monetary costs, are included.

c. market prices must be corrected if market is not competitive.

d. all of the above should be done.

Fill in the blanks (each question is worth 1 point)

13. Figure 2 shows the marginal abatement cost curve of a polluting source. Suppose the pollution control authority is targeting e level of emissions from this source. The authority can achieve this target by setting emission standard e or by imposing emission charge c per ton of emission. The authority lets the source choose between standard e and charge c. The source would choose standard e, as opposed to charge c, because the choice saves costs worth area(s) ____________.

14. In Figure 3, let MAC₁ be the currently available abatement technology and let e₁ be the number of tradable discharge permits the firm holds. Each permit authorizes the firm to discharge one ton of emissions in a year. Area(s) ________ denote the total abatement costs the source must incur to limit emissions to the level allowed by e₁ number of permits?

15. If the above source in Figure 3 innovates an improved method of abating pollution (MAC₂), the level of emissions emitted now would be ____.

16. The above source in Figure 3 saves on abatement costs with the innovation of MAC₂, and the source does not need as many permits now. Areas ______________ denote the sum of the saving of abatement costs and revenue from sales of surplus permits.

Short Answer Questions (each question is worth 2 points)

17. When would you implement zoned emission charges, instead of uniform emission charges?

18. Just like emission charges, emission subsidies can be efficient or cost effective and they can provide incentives to innovation. Give two reasons why you may prefer emission charges to emission subsidies.

19. Explain how a technology-based effluent standard (TBES) is different from an emission standard.

20. Explain how TBES offers weak incentives to innovation of improved methods of abating pollution.

21. The Wisconsin Department of Natural Resources implemented in March 1981 a tradable BOD permits system for discharging effluents into the Fox River. Only one permit was actually traded prior to 1990. Give two reasons that could explain the poor performance of the system.

22. Explain why it may be more cost effective to reduce emissions of nonpoint sources, compared to reducing emissions of point sources.

23. For the purpose of controlling emissions of criteria pollutants, the Clean Air Act Amendments of 1977 categorizes regions into "PSD areas" and "nonattainment areas." How does the Act define the two areas?

24. Distinguish between bubbles and offsets, the two programs under the emission reduction credits program allowed by the Clean Air Act Amendments of 1977.

25. State the "equimarginal principle."

26. "A society should prefer a lower emission reduction that can be enforced to a higher emission reduction that cannot be enforced." Draw an MAC-MD graph to show that the efficient level of emissions would be higher when marginal enforcement costs are included. Clearly label the axes, the curves, and the levels of emissions with and without enforcement.

27. Distinguish between "willingness to pay" and "willingness to accept." You do not need to talk about problems associated with measurement of WTA or WTP.

28. Distinguish between "with/without" principle and "before/after" principle of cost estimation.

Econ 3545 Environmental Economics, University of Colorado, Fall 1998

Instructor: Vijaya Sharma, Ph.D.

Answer Key to Final Exam Questions

Multiple Choice Questions

Fill in the blanks questions

Short Answer Questions

17. Zoned emission charges, as opposed to uniform emission charges, are implemented when emissions from sources located at different zones are associated with different marginal damages.

18. One would prefer emission charges to emission subsidies for the following reasons (you need to state any two):

a. subsidies are likely to invite entrance of new firms into the industry, resulting into overall increase in pollution,

b. sources are likely to overstate or raise the base level of emissions for receiving larger amount of subsidy,

c. the government needs to have resources to finance subsidy, and

d. subsidy may be considered morally wrong to reward polluters not to pollute.

19. A technology-based effluent standard (TBES) is also an emission standard, but tied to a particular technology (often BAT or BPT).

20. A source can comply with the TBES either by limiting emissions to the level specified by the standard or by installing and operating the technology on which the standard is based. Since installation of the specified technology is easy to monitor for the EPA, sources generally opt to use the specified technology to avoid potential litigations associated with noncompliance. Thus, the TBES works more like a technology standard in practice and thus offers no incentive to innovation of improved methods of abating pollution.

21. The following reasons can explain the poor performance of the tradable BOD permit system in the Fox River, Wisconsin (you need to state only two of them).

a. Limited validity (valid only for 5 years) of permits introduces uncertainty to the trade of permits.

b. Every trade has to be approved by the administration (the Wisconsin Department of Natural Resources) and has to be justified, increasing transaction costs.

c. Absence of competitive permit market (only few large buyers and sellers - oligopoly market).

d. Weak incentives to municipalities to minimize costs (the possibility of getting subsidy and the possibility of getting waivers from emission limitations).

e. Very liberal initial allocation of permits (required no substantial emission reduction).

22. Compared to nonpoint sources, point sources are more heavily regulated for pollution control. This gives rise to the possibility that marginal abatement cost is higher for point sources. If so, it would be cost effective to reduce emissions of nonpoint sources, until marginal abatement costs are equalized across point sources and nonpoint sources (the equimarginal principle).

23. PSD areas are those regions that have ambient quality of air better than the quality targeted by the Act; the objective in such areas is to prevent substantial deterioration of air quality. Nonattainment areas are those regions that have ambient quality of air worse than the quality targeted by the Act.

24. Bubbles program treats a firm as a single source for the purpose of technology-based effluent standard (TBES) and allows the firm to rearrange emission reductions among its multiple plants to minimize costs of compliance with the TBES. Offsets program allows a new source to be established or a major modification of an existing source to happen in a nonattainment area if new emissions from the proposed new source or modification are offset by an equivalent reduction by an existing source.

25. The equimarginal principle states that the cost of achieving a targeted level of emission reduction is minimized if marginal abatement cost is equalized across all sources and the sum of emission reductions by all sources is equal to the targeted level of reduction.

26. (You should draw a graph to answer this question.) Draw an MAC-MD graph, clearly labeling the axes and the curves. Let the intersection of the two curves (MAC and MD) correspond to e1 (a point in the horizontal axis and vertically below the intersection). Draw a curve similar to MAC but above the MAC curve, and label the new curve as MAC+MEC. This new curve represents both marginal abatement costs and marginal enforcement costs. Let the intersection of this new curve with the MD correspond to e2 in the horizontal axis. Note that e2>e1. That is, the efficient level of emissions is higher when we consider marginal enforcement costs.

27. "Willingness to pay" is the amount of benefit associated with an environmental resource, or the amount a person is willing to pay for the provision of the environmental resource. "Willingness to accept" is the amount of damages associated with an environmental "bad," or the amount a person must be compensated for the person to be willing to accept the environmental bad.

28. We use "with/without" principle, as opposed to "before/after" principle, in estimating costs of an environmental regulation. The with/without principle estimates costs for the same year, once assuming the environmental regulation is enforced and once assuming that the regulation is not enforced. The difference between the two costs is then the cost of regulation. On the other hand, the before/after principle estimates costs once for a year the regulation is enforced and once for a year the regulation was not enforced. The difference between the two costs, however, may not represent the cost of the regulation as many other factors, besides the regulation, may have changed in the interim period.