Deck 1: Environmental Economics and Natural Resource Management

Question 1

Briefly define the following :
-option value

Answer 1

The value people place on the option to use a resource in the future.

Question 2

Briefly define the following :
-primary standards for air quality

Answer 2

Standards designed to protect the public health.

Question 3

Briefly define the following :
-precautionary polluter pays principle

Answer 3

Polluters post a bond large enough to cover the worst-case scenario for environmental damage.

Question 4

Briefly define the following :
-perfect price discrimination

Question 5

Suppose you own a t-shirt factory that can save money by illegally dumping dye into a nearby river rather than disposing of it safely. If you illegally dump the dye, there is a 10% chance that it will cause minor environmental damage for which you will have to pay a $10 million fine. There is also a 15% chance that it will cause health damage to citizens for which you will have to pay a $100 million fine.
a. What is the expected value of the amount you will have to pay in fines? ________
Show your work.
b. If you would be willing to pay $20 million for insurance that would cover the cost of these fines if imposed, what is your risk burden associated with illegal dumping? _________
c. Is this firm risk loving, risk neutral, or risk averse (circle one).

Question 6

Suppose a small island economy uses its resources to produce mangos and national parks for tourism. What shape would you expect this economy's production possibilities curve to have? _________________ Explain why.
If this economy is producing on its production possibilities frontier, but it is not producing the socially optimal combination of goods:
a) What type of efficiency is this economy definitely achieving? _____________________
b) What type of efficiency is this economy definitely not achieving? ____________________

Question 7

Suppose Econarctica penguins live for two periods. In the first period of their life the penguins are young and they reproduce with a total fertility rate of 1. In the second period of their life they are old and they do not reproduce. The old penguins die and the young penguins' eggs hatch in between one period and the next. Assume half of each generation is female. In Period 1 there are 4 young penguins and 8 old penguins. How many penguins will be alive two periods later, in Period 3? _____
Please show your work.

Question 8

Market prices are more accurate measures of the value received from products when demand curves are

A) upward sloping.
B) downward sloping.
C) actually curved.
D) vertical.
E) horizontal.

Question 9

According to which model is social welfare maximized when assistance is pri?oritized for species that provide the greatest additional benefit per dollar spent on protection.

A) Zingerman model
B) Natural Monopoly model
C) Weak Sustainability model
D) Hard Path model
E) Noah's Ark model

Question 10

Which of the following is particularly vulnerable to starting-point bias?

A) IPAT
B) TCM
C) CVM
D) IMF
E) WTO

Question 11

A stated intent of energy deregulation was to

A) increase competition among energy providers.
B) increase prices to allow energy providers to make fair profits.
C) allow larger regional energy providers to replace smaller local providers.
D) increase the use of biofuels.
E) increase the use of hydroelectricity.

Question 12

The environmental Kuznets curve suggest that to reduce pollution we should

A) increase population.
B) moderate income per capita.
C) make income per capita very high.
D) eat a European diet.
E) use more nuclear power.

Question 13

Which of the following is the most likely to prevent Coasian solutions from solving externality problems?

A) A single source of the externality
B) A single victim of the externality
C) Asymmetric information
D) A lack of transaction costs
E) An externality that takes effect immediately

Question 14

According to the textbook, shortages, such as the shortage of food that Thomas Malthus predicted would cause starvation, can be reduced or avoided by all of the following EXCEPT

A) new discoveries
B) technological improvements
C) lower prices
D) the market mechanism
E) advancements in exploration for new supplies

Question 15

The optimal level of pollution is

A) zero.
B) found where the total cost of pollution equals the total benefit.
C) found where the marginal cost of pollution equals the marginal benefit.
D) found where the marginal benefit of pollution is maximized.
E) the level that has no effect on the environment.

Question 16

Which of these solutions to the tragedy of the commons did Hardin advocate?

A) voting
B) taxation
C) privatization
D) subsidies
E) bargaining

Question 17

Which of the following is not a source of market failure?

A) multiple firms selling identical products
B) imperfect competition
C) imperfect information
D) public goods
E) externalities

Question 18

Light, noise, and heat are provided in the reading as examples of what type of pollutant?

A) stock
B) fund
C) flow
D) stationary source
E) mobile source

Question 19

a. If someone doesn't care about future generations, does this makes their rate of time preference (discount rate) higher or lower (circle one)?
b. If you are willing to accept no less than $1200 in one year in exchange for providing a loan of $1000 now, what is your discount rate? ________
c. For someone with a discount rate of 15%, what is the present value of saving wildlife that would be worth $500 million in 120 years? ________ Show your work

Question 20

Suppose the LNG Inc. company wants to build three pipelines that would carry fuels under your city. The pipelines pose risks of groundwater contamination and explosion. For each pipeline the table below shows the marginal benefit to LNG Inc. and the marginal cost of expected damages to residents (in millions of dollars).
$$\begin{array} { c c c c c } \text { Pipelines } & \begin{array} { c } \text { Total Profits } \\\text { for LNG Inc. }\end{array} & \begin{array} { c } \text { Total Damage to } \\\text { Residents }\end{array} & \begin{array} { c } \text { Marginal Benefit } \\\text { (added profits) }\end{array} & \begin{array} { c } \text { Marginal Cost } \\\text { (added damages) }\end{array} \\\hline \hline 0 & 0 & 0 & 0 & 0 \\1 & - & - &120 & 55 \\2 & - & - & 80 & 75 \\3 & - & -& 70 & 125\end{array}$$ a. Fill in the blanks in the table.
b. What is the efficient number of pipelines? _____________
c. Suppose that LNG Inc. is entitled under the injunctive remedy. What is the range of offers (in millions of dollars) that the residents might make and LNG Inc. might accept to eliminate the third pipeline? Between __________ and ___________.
d. If residents are entitled under the damages remedy, at the level of output selected by LNG Inc., what is the total amount of compensation LNG Inc. will provide to the residents? _____________

Question 21

Suppose tourists spend $8 billion annually to visit wilderness areas in Utah. This information alone could be used to estimate the value of Utah's wilderness areas using what method?
Identify two types of value that this method fails to capture.

Question 22

Suppose each year of education a student receives provides $1000 worth of external benefits to society because students share their wisdom, support better policies, and serve as more productive workers. On the graph to the right, draw typical-looking curves for the private marginal benefit and the private marginal cost (just like the ones for beehives and airline flights among other goods in the textbook). Add the social marginal benefit curve as appropriate for this particular situation. Label the socially optimal quantity of years of education "Qs" and label the quantity that will actually be purchased (in the absence of government intervention) "Qp".
Using a specific number in your response, indicate one approach the government could take to achieve the socially optimal quantity of education.

Question 23

Suppose Appalachia has 200 tons of coal to allocate between this period and next period. The net marginal benefit curve for coal this period is a straight line with a vertical intercept of 200 and a horizontal intercept of 200. The net marginal benefit curve for coal next period is a straight line with a vertical intercept of 200 and a horizontal intercept of 100.
a) Draw the net MB curves for each period on the graph.
b) If the discount rate for benefits next period is infinity, what is the dynamically efficient quantity of coal to use in the present period? ______
c) Use a dotted line to draw the discounted net marginal benefit curve if the discount rate for benefits next period is 300%.
d) Assuming the discount rate for future benefits is 300%, label the dynamically efficient quantity of coal to use this period as Q₁.

Question 24

Suppose Kevin and Sara are the only inhabitants of an island with no butterfly species. Butterfly species are a public good that can be purchased for the island. Kevin would pay up to $90 for the first butterfly species, $40 for the second butterfly species, and nothing for any additional butterfly species. Sara would pay up to $60 for each butterfly species up to a quantity of five.
On the graphs below, draw the demand curves for butterfly species for Kevin, Sara, and the market. Label each axis and the (specific numerical) height of each demand curve for each quantity up to 5 butterfly species.
If butterfly species cost $95 each, what is the socially optimal quantity of butterfly species? __________

Question 25

Identify the fuel that matches the description.
-It can power combustion engines and fuel-cell electric vehicles. Electricity generated from the reaction of it and oxygen from the air provides fuel cells with clean, quiet power. The only emis?sions are pure water and heat. ________________

Question 26

Identify the fuel that matches the description.
-It is made from renewable plant oils or animal fats and can run in current diesel engines. ____________________

Question 27

Identify the fuel that matches the description.
-Like coal and oil, it has its origins in the swamps of past geologic periods, but it is relatively clean burning and abundant. ___________________

Question 28

The following table shows the net annual profits (in millions of dollars) for two clothing companies, Street 21 and American Beagle, depending on whether they choose to make their jeans with organic cotton or cotton grown using pesticides. Within each square, the number on the left indicates Street 21's profit and the number on the right represents American Beagle's profit.

-the firms could cooperate on their strategy selection, trust each other, and divide their combined profits equally, what set of strategies would they choose?
American Beagle:
Street 21:

Question 29

The following table shows the net annual profits (in millions of dollars) for two clothing companies, Street 21 and American Beagle, depending on whether they choose to make their jeans with organic cotton or cotton grown using pesticides. Within each square, the number on the left indicates Street 21's profit and the number on the right represents American Beagle's profit.

-the firms could not trust each other enough to collude, is there a dominant strategy for either or both firms? If so, what it is?
American Beagle:
Street 21:

Question 30

Briefly define each of the following terms:
-Flow pollutant

Question 31

Briefly define each of the following terms:
-Risk burden

Question 32

Briefly define each of the following terms:
-Front Page of the Newspaper Test

Question 33

Identify a specific method described in the textbook other than the CVM for placing a value on each of the following assets and briefly describe how exactly the value would be obtained using that method. Do not apply the same method more than once.
a) A national park Method: __________________
b) Safe tap water Method: __________________
c) Human life Method: __________________

Question 34

Suppose expanded use of nuclear power would involve a 5% chance of problems causing the release of enough radiation to kill 10 people and an additional 1% chance of the release of enough radiation to kill 500 people. Assume unidentified humans such as those who might die as the result of nuclear disasters are found to be worth $9 million each. If the discount rate is zero, what is the expected value of the human loss from nuclear expansion?
Suppose instead that the discount rate is 10% and the expanded use of nuclear power would certainly kill 100 people in 20 years. What is the present value of the human loss due to nuclear expansion?

Question 35

Command-and-control environmental policies differ from market-based environmental policies.
a. What is one distinguishing characteristic of command-and-control environmental policies?
b. Provide one example of a command-and-control policy.
c. What is one distinguishing characteristic of market-based environmental policies.
d. Provide one example of a market-based policy.

Question 36

The textbook explains several indexes that improve on GDP as measures of welfare and progress.
a. Identify one category of goods that is included in GDP but not in these indexes? ___________________
b. Provide an example of a good in the category identified in part (a). ______________________________
c. What type of production do the alternative indexes include that is not part of GDP? _________________
d. Provide an example of that type of production. ______________________________________________
e. Identify an example of one of these alternative indexes. _______________________________________

Question 37

Your roommate wants you to be happy, but not too happy, which would make your roommate jealous. If you have 0 utils, your roommate feels bad for you and has 0 utils. For the 1^st 6 utils you gain, your roommate gains 1 util for every 2 that you gain. After that, more utils for you make your roommate resentful and less happy. Your roommate losses 1 util for every 2 utils you gain beyond 6. Draw a utility distribution curve by plotting the relationships described above. Label the points representing the Rawlsian, utilitarian, and egalitarian solutions "R," "U," and "E," respectively. The dotted 45-degree line and numbers are provided as guides that you might find useful.

Question 38

Suppose there are 1 billion tons of titanium dioxide in the world and two periods: sooner and later. What we use sooner, we can't use later. Titanium is sometimes used to build rocket ships and road bikes among other light and durable products. With Q representing the quantity of titanium used sooner, the marginal benefit (net of any costs) from titanium used sooner is MB_sooner = .6 billion - Q. The (net) marginal benefit from titanium used later, MB_later, is constant at .6 billion. That is, every unit of titanium used later has a marginal benefit of .6 billion.
a) Illustrate this situation with a two-period model (as shown in the textbook) that includes both marginal benefit curves, labeled MB_sooner and MB_later.
b) If we don't discount benefits received later, what is the dynamically efficient quantity to use sooner? _______.
c) If the present value of benefits received later is one-half of their value later, what is the dynamically efficient quantity to use in each period? Sooner ________ Later ________
d) If we have an infinite discount rate for benefits received later, what is the dynamically efficient quantity to use in each period? Sooner ________ Later ________

Question 39

Draw the environmental Kuznets curve. Be sure to label everything. Explain how the Kuznets relationship helps to justify an agenda of economic growth.

Question 40

What is the optimal harvest condition for a tree? (Either version is fine.)
Explain why this equation makes sense in common sense terms

Question 41

Weak sustainability requires the maintenance of

A) the total capital stock
B) natural capital
C) physical capital
D) human capital
E) specific components of natural capital

Question 42

In the absence of externalities, which of the following will produce the efficient quantity for society?

A) A monopoly
B) A natural monopoly
C) A monopoly selling organic vitamins
D) A monopoly that practices perfect price discrimination
E) A monopoly run by an ethical egoist

Question 43

The most efficient water use occurs under a _____ plan.

A) Flat rate
B) Flat fee
C) Average cost
D) Decreasing block
E) Marginal cost

Question 44

Under the Gordon fisheries model, without intervention, fishers keep entering until … (you might want to draw the graph as a reminder)

A) social marginal revenue equals average revenue
B) social marginal revenue equals marginal cost
C) marginal cost equals rent
D) marginal cost equals average revenue
E) average cost equals rent

Question 45

According to Hotelling's rule,

A) one should treat others as one likes to be treated.
B) marginal social cost equals marginal social benefit.
C) you should never mix your liquors.
D) net marginal benefit rises at the rate of the in situ value
E) marginal rent rises at the discount rate

Question 46

A problem with hydrogen as an alternative fuel is

A) the exhaust contains greenhouse gases
B) hydrogen fuel cell motors make a lot of noise
C) it is difficult to store and distribute
D) hydrogen is relatively scarce
E) the word hydrogen was patented by Exxon-Mobil and no one else can legally use it

Question 47

Greenhouse gases are

A) concentrated pollutants
B) nonuniformly distributed pollutants
C) uniformly distributed pollutants
D) flow pollutants
E) gasses released in greenhouses to make vegetables flavorful

Question 48

-Consider a fishery with annual growth as shown by the curved line in the figure. For each of the five possible starting stock levels, indicate what the fish stock level would be in the long run (that is, after many periods) if there were a continued annual catch of Catch_A.
S_A : , S_B : , S_C : , S_D : , S_E :

Question 49

Recently 695 residents filed a lawsuit against a nearby slaughterhouse that sprayed wastewater on fields, allegedly tainting wells and causing illness. Suppose that, if the lawsuit continues to trial, both sides expect the residents to receive a jury award of $2 million. The additional legal fees if the case proceeds to trial will be $300,000 for the residents (the plaintiffs) and $400,000 for the slaughterhouse (the defendant). On the number line below, label and specify the dollar amount of the expected jury award (J), each side's threat point (T_p and T_d), and the settlement range. Assume both sides are risk-neutral and seek to maximize their money.
$$\longleftrightarrow$$ a. What is the bargaining rent in this case? ______
b. If the slaughterhouse can make a credible (non-Sincerity Rule) final offer, what should it be? ______
c. If the residents make a Sincerity Rule offer, what should it be? ______
d. Identify one alternative dispute resolution technique discussed in the textbook that involves a third party who makes a binding decision.

Question 50

Suppose that goldfish in the local pond live for 2 years. At the end of their first year they reproduce with a TFR of 4; in their second year they just swim around, and then die when the period is over. There are equal numbers of males and females at each goldfish age level. Indicate the total number of fish after 1 and 2 years under the following scenarios:
a) In the beginning there are 2 fish in their first year of life and none in their second year of life.
after 1 yr. _____ after 2 yrs. _____
b) In the beginning there are 10 fish in their second year of life and no fish in their first year of life.
after 1 yr. _____ after 2 yrs. _____

Question 51

Wild American ginseng roots can be sold legally if they are harvested from plants over 5 years old in appropriate places during a designated season. Poachers of American ginseng break these rules and threaten the species' existence. Possible policies to address the problem include:

A) a program that increases the supply of legal ginseng
B) a complete ban on ginseng production
C) a campaign to discourage ginseng purchases
The graph below shows the illegal supply, the total (illegal plus legal) supply, and the demand for wild American ginseng. Assume that none of the policies affect the illegal supply curve.
How many thousands of pounds of illegal ginseng will be supplied per year if
a) none of the policies is implemented. _____
b) only plan (A) is implemented, and it increases the legal supply by 2 thousand pounds per year at each price but has no effect on the demand curve. _____
c) only plan (B) is implemented, which eliminates the legal supply of ginseng but has no effect on the demand curve. _____
Suppose only plan (C) is implemented. Draw the new demand curve such that the resulting quantity of illegal ginseng supplied is 2 thousand pounds per year.