Student ID ________________ Semester One Assessment, 2015 Faculty / Dept: Economics Subject Number ECON 90016 Subject Name Environmental Economics and Strategy Writing time 2 hrs Reading 15 minutes Open Book status Closed book Number of pages (including this page) 6 Authorised Materials: Language dictionaries. Instructions to Students: Answer exactly 4 of the questions for maximum marks. All questions have equal value. Instructions to Invigilators: None. Paper to be held by Baillieu Library: yes X____ No ____ The University of Melbourne—Semester 1 Assessment 2015 Department of Economics Environmental Economics and Strategy ECON 90016 Time Allowed 2 hours Reading Time 15 minutes This examination contributes 70 percent of the total assessment. Exactly 4 questions should be attempted for maximum marks. All questions have equal value. This paper has 5 pages. Authorised materials: Foreign language and English language dictionaries are permitted. Programmable calculators are not permitted. This paper can be removed from the exam room. This paper will be held in the Baillieu library. Page 1 of 5 2 1. Two communities A (a “rich” community) and B (a “poor” community) are involved in the supply of the public good “biodiversity conservation”. Initially there are only two supply options – provide the good (P) or do not provide the good at all (NP). The net benefits to each community from supplying this good depend on the voluntarily selected actions of each group and are summarized in a payoff matrix whose entries indicate net benefits to the respective group. (a) Consider the payoff matrix: B A NP P NP -1, -1 -2, 6 P 6,-2 5, 5 Characterize the structure of this strategic situation using game theory language and discuss what the Nash equilibria of this game are? In what sense is the equilibrium outcome here inefficient? (5 marks) (b) What policy action might a government introduce to restore efficiency in the game described in part (a)? (5 marks) (c) Suppose the structure of the game is alternatively described by the payoff matrix: B A NP 2, 2 0, 1 NP P P 1, 0 4, 4 Why might this pattern of payoffs be plausible? Characterize the structure of this strategic situation and discuss what the Nash equilibria of this game are? How can an efficient outcome be achieved in this case? (5 marks). (d) Suppose that, contrary to the initial description, the quantity of this public good (call this x hectares of land) can be varied continuously. Suppose the marginal willingness to pay for this resource among the rich is MWTPA = 10-0.6x while that of the poor is MWTPB = 5-0.4x. Suppose the marginal cost of conserving a hectare of land is $10. How many hectares of land should be conserved by a government seeking to achieve social efficiency? (5 marks). Page 2 of 5 3 2. Show how cost benefit analysis can be used to either: (a) Efficiently provide species biodiversity. or (b) Efficiently choose a time for building and for determining the scale of a desalination plant when society faces the uncertain prospect of a permanent reduction in rain-fed water supplies because of anthropogenic climate change. You can only attempt these questions if you did not cover the topic in your seminar/essay presentation. You must choose at most one of these two alternatives. (Each alternative is worth 20 marks). 3. (a) What externality issues are associated with cigarette smoking in Australia? Are public health concerns an externality issue? Would your answers to these questions change if it were posed for China instead? (5 marks). (b) Survey the pricing and non-price policies that can be advanced to reduce the extent of cigarette smoking in Australia? (5 marks). (c) Why is it difficult to convince members of the public that congestion pricing will provide social welfare gains? (5 marks). (d) Discuss the effects of different drivers having different valuations on travel time, of the same driver having different valuations for different types of travel and drivers facing traffic flow uncertainty on the case for introducing congestion pricing? (5 marks). 4. (a) Does it matter whether Australia uses a carbon tax to control carbon emissions or uses emissions subsidies? (6 marks). (b) How is the social discount rate determined in the Stern climate model? Is it too low? What are the practical policy implications of choosing a low discount rate? (6 marks). (c) How do carbon leakages limit the ability of nations to agree to a binding international climate agreement? What can be done to offset the effects of such leakages? (8 marks). Page 3 of 5 4 5. Consider a fixed band of vacant useable land and conserved greenbelt land around a large city that is growing in population and wealth. (a) Apply the Hotelling theory of exhaustible resource use to the price dynamics for the vacant useable land on the border of this city? How will this land be priced now and over time? (6 marks). (b) What are the immediate and longer-term implications of a release of extra land to this fixed band from greenbelt land? Provide a diagram illustrating the effects. (7 marks). (c) Suppose citizens from this city can, as the result of an unexpected policy decision, relocate to a nearby satellite city with abundant land that can be made available to citizens at a fixed backstop price. How will this prospect affect the price of land in the original city both immediately and longer-term? (7 marks). 6. (a) Is the strong interest of environmental economics with efficiency-based outcomes immoral? When can distributional outcomes be reasonably ignored in making sound efficiency judgments? (9 marks). (b) A congestion road pricing decision made by government disadvantages the welfare of poor people who live in an outlying area because land is cheap there. Discuss the arguments for road pricing in this situation when compensations to this group are possible and when they cannot be made? (6 marks). (c) How can the interests of poor developing nations be protected when seeking an efficient global climate change agreement? (5 marks). Page 4 of 5 5 7. Organizations such as PETA (People for the Ethical Treatment of Animals) have criticized the way farm animals in Australia (and elsewhere) are slaughtered for food. Alternative, more humane slaughtering techniques involve higher costs. Consider the specific case of beef cattle. (a) Analyze the microeconomic effects on competitive agricultural markets for beef of accepting the validity of such criticisms and of implementing policies to reflect these concerns. (6 marks). (b) Suppose the publicity campaign launched by PETA also reduces the demand for beef products in Australia because consumers dislike the idea that they rely on a cruel slaughter process. How will this affect the beef market and the welfare of farmers following the introduction of more humane slaughter policies? (7 marks). (c) Emerging countries such as China are substantial consumers of Australian beef and these demands are increasing. How will these trends impact on the welfare of farmers assuming the reforms suggested by PETA are implemented? (7 marks). 8. Pose a question on an aspect of the course that interests you and which involves a public policy issue related to the environment. The topic chosen must: (i) Not be dealt with directly in the questions posed above, (ii) not be dealt with by you in your essay topic for this subject and (iii) not be the subject of your own class seminar presentation. (20 marks). End of examination. Page 5 of 5 Library Course Work Collections Author/s: Economics Title: Environmental economics and strategy, 2015 Semester 1, ECON90016 Date: 2015 Persistent Link: http://hdl.handle.net/11343/90935
