ECON3128/ECON8040_Semester 2 Resource and Environmental Semester 2 – Mid-Semester, 2020

Multiple Choice Questions (24 points, 1 point each)

Please record the correct answers on your answer sheet.

1. The concept of “meeting the needs of the present without compromising the ability of future generations to meet their own needs” is known as...

a) Economic growth

b) Third-party effects

c) Ecological economics

d) Sustainable development

e) Carrying capacity

2. Which of the following components in the economic value of the environment reflect the concept of human-centric view?

a) Direct use value

b) Option value

c) Bequest value

d) Exist Value

e) All of above

3. Which one of the following statements about sustainable development is false?

a) Environmental economists emphasize maintaining human well-being in defining sustainable development.

b) Ecological economists emphasize the maintenance of ecological systems in defining sustainable development.

c) Population growth rates are highest in developing countries.

d) Limiting population growth is an important element of sustainable development.

e) To achieve sustainable development, residents in rich countries must live in a lower living standard than their current living standards.

4. From an economic perspective, there is “too little” pollution in a market if ...

a) The profits of businesses are not maximized.

b) The marginal benefits of a polluting activity exceed the marginal costs.

c) The marginal costs of a polluting activity exceed the marginal benefits.

d) The net social benefits of pollution are zero.

e) The net private benefits of pollution are zero.

5. Which one of the following statements is false?

a) A Pigouvian tax is used to internalize external pollution costs.

b) Transactions costs could reduce the potential for parties in a dispute to reach an efficient agreement.

c) The assignment of initial property rights affects the equity of an allocation based on the Coase Theorem.

d) The “optimal” level of pollution is unlikely to be zero.

e) The “optimal” level of pollution maximizes industry profits.

Consider the following graph for question 6 and Question 7

 

6. The graph above represents an industry for a common property resource, with profits in the industry shown as a function of harvest effort. In this graph, what is the quantity that   represents the open-access equilibrium level of effort?

a) Q1

b) Q2

c) Q3

d) Q4

e) Q5

7. Considering again the graph on page 4, what is the quantity that represents the economically efficient level of effort?

a) Q1

b) Q2

c) Q3

d) Q4

e) Q5

8. The efficient price of a license fee is determined by the difference between ...

a) Marginal revenue and marginal cost at social optimal equilibrium.

b) Average revenue and marginal cost at social optimal equilibrium.

c) Total revenue and total cost at social optimal equilibrium.

d) Average revenue and total cost at social optimal equilibrium.

e) Total revenue and marginal cost at social optimal equilibrium.

9. Which one of the following is least likely to be considered a public good?

a) An interstate highway

b) A national park

c) Wildlife

d) A river

e) A golf course

10. Which one of the following statements about public goods is true?

a) Problems with public goods can always be solved by charging a fee to use the good.

b) Public goods are commonly funded through taxation.

c) Public goods will tend to be oversupplied by private markets.

d) Money to provide public goods is commonly collected from free riders.

e) Public goods are any goods owned or provided by governments.

11. The socially optimal provision of a public good can be obtained by ...

a) Vertically adding the demand curves for the good.

b) Horizontally adding the demand curves for the good.

c) Eliminating access to the good.

d) Allowing open access to the good.

e) None of above

12. Which one of the following statements is false?

a) Market solutions are always economically efficient.

b) Problems with global commons are partly a result of free riding.

c) Public preferences are not always expressed in markets.

d) Public and private preferences may differ.

e) Public goods often tend to be undersupplied.

13. Assuming economic efficiency is maximized, when will more of a resource tend to be used in the first time period (as compared to future time periods)?

a) Whenever the discount rate is positive

b) Whenever the marginal net benefits in the present are positive

c) Whenever the discount rate is zero

d) Whenever the user costs are positive in the present

e) Whenever the marginal net benefits in the future are negative

14. User costs will be incorporated into a market if ...

a) Interest rates are positive.

b) Discount rates are zero.

c) Resource owners foresee future shortages.

d) Government intervention is eliminated.

e) Discount rates fluctuate.

15. Which one of the following statements is false?

a) User costs can be incorporated into a market by imposing a resource depletion tax.

b) Government intervention may not always be necessary to internalize user costs.

c) Users costs should always be set to zero to maximize economic efficiency.

d) Incorporation of user costs will raise current prices.

e) Consideration of user costs will reduce current production.

16. Suppose a respondent in a contingent valuation survey indicates that he is not willing to pay anything for an environmental good because he feels he already pays enough in    taxes. This is an example of what type of problem?

a) Nay-saying

b) Strategic bias

c) A protest bid

d) Non-response bias

e) Range bias

17.Which one of the following statements is false?

a) Bequest value is the value of environmental goods or services to future generations.

b) In contingent valuation surveys, willingness-to-pay tends to be smaller than willingness-to-accept.

c) Replacement cost methods consider the cost of constructing facilities to provide environmental services.

d) Contingent valuation can be used to estimate existence values

e) The value ofjust knowing a wild species exists is called indirect use value.

18. Which one of the following statements about contingent valuation (CV) is true?

a) In CV surveys, willingness-to-accept values tend to be larger than willingness-to-pay values.

b) Open-ended CV questions are preferred by most environmental economists.

c) In a single-bounded CV question, the respondent simply writes down his or her maximum willingness-to-pay.

d) In a single-bounded CV question, the respondent simply circles a value that most      accurately reflects his or her maximum willingness-to-pay, from a list of several values.

e) In a multiple-bounded CV question, a respondent is asked to value several environmental goods or services at the same time.

19. Which one of the following techniques would most likely be used to estimate the value of a lake heavily used by boaters and swimmers?

a) Hedonic pricing

b) Travel cost models

c) Defensive expenditures

d) Replacement cost methods

e) Contingent valuation

20. Which one of the following techniques would most likely be used to estimate the value of preserving of a remote arctic wildlife preserve?

a) Hedonic pricing

b) Travel cost models

c) Defensive expenditures

d) Replacement cost methods

e) Contingent valuation

21. An economist estimates the value of clean drinking water by looking at the amount people spend on bottled water. This is an example of what type of economic valuation?

a) Hedonic pricing

b) Replacement cost methods

c) Contingent valuation

d) Travel cost models

e) Defensive expenditures

22. Healthy forests store carbon dioxide, helping to mitigate the negative effects of climate change. This is an example of what type of economic benefit?

a) Direct use value

b) Indirect use value

c) Existence value

d) Option value

e) Bequest value

23. A decision to postpone commercial development of an undisturbed parcel would be an example of what type of economic benefit?

a) Direct use value

b) Indirect use value

c) Existence value

d) Option value

e) Bequest value

24. A local forest provides habitat for deer that are harvested by hunters. The hunters receive what type of benefit in this case?

a) Direct use value

b) Indirect use value

c) Option value

d) Bequest value

e) Existence value

Short Answer Question (10 points)

25.Consider Coase theorem. Suppose the households have the right to clean water and the factory must negotiate to pollute. Further suppose the community consists of 1000            households and the factory must negotiate with individual household. The factory will be able to produce only if every household agree on the output level. Will the social optimal level of production likely to be reached in this scenario? Briefly explain why or why not? (5 points)

26. The house near a forest is priced higher than comparable houses due to the better air quality. The higher house price reflects which component of the economic value of       forest? Briefly explain how you reach your answer (5 points)

Problem Solving (66 points)

27. The demand and supply of a fertilizer are given by PD  = 50 − Q

PS  = 10 + Q

In addition, the community suffers a negative externality of $20 for each unit of fertilizer produced due to water pollution.

a.   Draw the supply demand graph of the fertilizer market. Mark the equilibrium with and without the appropriate Pigovian Tax. Indicate the externality costs with and  without tax by the relevant areas on the graph. (9 points)

label your graph carefully (that includes axis, all curves and equilibria prices and quantities).

b.   Calculate the consumer surplus, producer surplus, externality costs, and total social welfare with and without Pigovian Tax. (6 points)

c.   Name one potential policy which has a similar total social welfare effects as a Pigovian Tax. Explain in one sentence how the policy works. (3 points).

For part (d) and (f), suppose there is a threshold of water pollution level, production level exceeds the threshold will cause more negative externalities. The per-unit       externality of production is now given by the equation below.

$20 if Q ≤ 9

$60 if Q > 9

d.   Draw the supply and demand graph with new social marginal costs curve (4 points)

e.   Work out the social optimal level of production. (2 points)

f.   How much should be the correct per-unit tax to achieve social welfare maximising outcomes in this situation? (2 points)

28. Suppose we are analysing the intertemporal allocation of crude oil. Specifically, we   are considering a market of crude oil over two periods. In the first period the demand and the supply for crude oil are given as follow

PD  = 90 − 0.3Q

PS  = 30

where Q is the quantity in millions of barrels of crude oil. In the second period demand and supply remain the same.

a.   Consider only the first period. Derive the marginal net benefit and market equilibrium for the crude oil. (3 points)

b.   Suppose the discount rate from the first to the second period (which is far in the    future) is 200%. The total crude oil supply over two periods is 200 million barrels. Calculate the efficient allocation of resources between the two generations. (6       points)

c.   Show the optimal intertemporal resource allocation (in part (b)) on a two-period  graph (the graph with both periods’ marginal net benefit curves). While the scale can be approximate, make sure to label your graph (that includes axis, all curves and equilibria prices and quantities). (6 points)

d.   What is the appropriate resource depletion tax in the first period? (3 points)

e.   Draw a supply-and-demand graph, approximately to scale, showing the                 equilibrium price and quantity consumed in the first period. Then add to the graph the social cost schedule (supply with user costs), the resource depletion tax, and    the dynamic equilibrium. Make sure to label your graph. (9 points)

f.   For this sub-question assume the total crude oil supply over two periods is 600    million barrels. Everything else remains the same. Calculate the efficient             allocation of resources between the two generations and work out the user cost at the efficient allocation of resource. (5 points)

g.  Now assume the total oil supply is again at 200 million barrels over the two         periods and the discount rate remains at 200%. The supply and demand for crude oil in the first period are as given above. But the marginal net benefit for the        second generation is given as follow

MNB2 { 90

if Q < 90

if 90 ≤ Q ≤ 120

if Q > 120