University of Alberta
Economics 269
Economics of the Environment
Final Exam
Gordon Lee
April 2023
This exam has three sections. Read the instructions to each section carefully. Read each question carefully.
Section A (30 points)
For any six of the following eight terms provide a brief description of the term and briefly discuss how
the term relates to the study of economics and the environment.
a. The Precautionary Principle
b. Free Rider Problem
c. SLAPP
d. BATEA
e. Bubble Policy
f. Hydro-Quebec vs. R (1997)
g. CVM
h. SRTP
Section B (20 points)
Select the best answer to the following multiple choice questions.
1.
Open Access Resources are overharvested because
a. they are tasty, especially if served with a nice Chianti.
b. harvesting costs are always extremely low.
c. the prices of these goods rise quickly as their stock numbers fall.
d. their property rights are nonexclusive and rival.
e. governments historically refused to take policy action.
2.
A market economy tends to __________ goods with negative externalities and _______
goods with positive externalities.
a. overproduce; overproduce.
b. overproduce; underproduce.
c. underproduce; overproduce.
d. underproduce; underproduce.
e. produce; consume.
3.
Consider the MDC and MAC diagram. New findings of adverse health effects or other damages
from the pollutant will
a. shift the marginal damage cost curve leftward.
b. shift the marginal abatement cost curve rightward.
c. shift both the marginal damage cost curve and the marginal abatement cost rightward.
d. have no effect on either the marginal damage cost curve or the marginal abatement cost curve.
e. increase the optimal level of emissions.
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4.
Suppose there are issues in regards to water pollution in Buffalo Lake, a lake located in
Alberta approximately 40 km east of Red Deer. The water pollution results from emissions
from oil and gas producers. In regards to policy then
a. the Government of Alberta has jurisdiction as this is an inland fishery.
b. the Government of Alberta has jurisdiction as this involves a matter merely in nature.
c. the Government of Canada has jurisdiction as this involves the management of oil and gas
resources.
d. the Government of Alberta has jurisdiction granted to it via POGG.
e. the Government of Canada has jurisdiction as this is an inland fishery.
5.
The Melmac Agency has been hired by the government of Freedonia to determine the value
of the Freedonian Elk (Cervus Freedonius). The agency has decided to do this valuation by
surveying individuals. The survey involves asking people to evaluate 6 different trip
packages, all of which involve different levels of sightings of the Elk, different suggested
payment levels and differences in other environmental attributes. The individuals are then
asked to assign a number to the trips, with the highest number indicating their most
preferred trip. This method of benefit estimation is referred to as
a. hedonic pricing.
b. the contingent valuation method.
c. the conjoint method using contingent rating.
d. the conjoint method using pairwise comparisons.
e. cognitive dissonance.
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Section C (50 points)
Do five of the following 8 questions. Each question is worth ten points.
Question 1
Recently, the following discussion occurred on the program Spectrum:
Presenter
Hardacre
Presenter
Tiddles
Presenter
Good evening. Tonight 'Spectrum' looks at one of the major problems in the world
today - that old vexed question of what is going on.
Is there still time to confront it, let alone solve it, or is it too late?
What are the figures, what are the facts, what do people mean when they talk about things?
Let us ask Alexander Hardacre of the Economic Affairs Bureau.
Cut to equally intense pundit in front of a graph with three different coloured columns
with percentages at the top.
He talks with great authority.
In this graph, this column represents 23% of the population. This column represents 28%
of the population, and this column represents 43% of the population.
Cut back to presenter.
Telling figures indeed, but what do they mean to you, what do they mean to me,
what do they mean to the average man in the street?
With me now is Professor Tiddles of Leeds University. Professor, what do you think?
Well speaking as a free market economist, I believe that the problems associated with
endangered species can be solved by simply letting the market rule. Market forces will simply
prevent any species from going extinct.
Indeed, when it comes to talking about market forces, I just drone on and on and on...never
letting anyone else get a word in edgeways, until I start foaming at the mouth and fall over
backwards. (He foams at the mouth and falls over backwards)
Cut to 'Spectrum' studio: same presenter as before, sitting at desk.
Foam at the mouth and fall over backwards. Is he foaming at the mouth to fall over
backwards or falling over backwards to foam at the mouth.
Tonight 'Spectrum' examines the whole question of frothing and falling, coughing and
calling, screaming and bawling, walling and stalling, galling and mauling,
palling and hauling, trawling and squalling and zalling. Zalling? Is there a word zalling?
If there is what does it mean...if there isn't what does it mean?
Perhaps both. Maybe neither. What do I mean by the word mean?
What do I mean by the word word, what do I mean by what do I mean?
Explain how the market forces can solve the problems associated with endangered species.
What problems do you foresee in letting the market rule?
What policy solution would you suggest?
Question 2
Quoting Thomas Schelling,
“The need for environmental polices often arises due to the failure of the price system”.
Evaluate this statement in terms of the environmental problems of pollution and preservation of
endangered species.
For one of these two problems, discuss how you would try to correct the failure in the price system.
What practical problems do you foresee in trying to implement any policy to correct this price system
failure?
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Question 3
In Freedonia, a company that produces textiles uses water from a local water in its production process.
Later the water is returned to the water but it now contains several pollutants. This water is also used
downstream by a community for consumption and recreation.
Suppose that the marginal damage costs are given by
MDC = 8 e
where e is the quantity of emissions.
The marginal abatement costs are given by
MAC = 5000 - 10 e.
a.
Determine the socially optimal level of emissions.
b.
Draw a diagram illustrating the optimal level of emissions and the costs associated with this optimal
level of emissions.
c.
Suppose an alternative technology exists to produce textiles. This technology is associated with
lower marginal abatement costs of MAC = 2777.8 – 10 e.
A local politician, Mrs. Premise, has suggested that no policy is necessary to control this pollution.
The optimal level can simply be attained by asking the polluter to voluntarily switch to the new
technology.
Is she correct?
What problems do you see with her plan?
Question 4
The Notlob Resort Hotel has a spectacular view of a pine forest along a river bank. Suppose a
commercial logger has purchased the pine forest and is planning to clear cut the forest in a way that has a
negative impact on the resort. A local policy analyst, Professor Ximenez has recommended that the
owners of the logging company should be guillotined. A national economist, Arthur ‘Two Sheds’
Jackson has instead recommended a Coase approach.
How would Coase be applied here?
Could Coase be used if instead a hotel, a large group of individuals owned holiday cabins with a view of
the pine forest.
In this second case, what policy would you suggest?
Question 5
Suppose that several firms are polluting the air in Pavement Narrows. The marginal damage costs arising
from this pollution are MDC = -30 + 20 e.
For the polluting firms, the marginal abatement costs are MAC = 720 - 7.5 e.
a.
Suppose that the government of Pavement Narrows decides to use an emissions tax. What will
the tax rate be? What will be the optimal level of emissions?
b.
Suppose that instead the government could issue permits. What will the number of permits be?
c.
Finally, suppose that in year 1, the MAC and MDC are as described above and the government
auctions permits that are good for one year. In year 2, several new polluters move into the area.
The MDC curve does not change but the MAC curve now becomes MAC* = 1000 - 7.5e.
The government is considering two policies;
policy (i) Auction permits where the number of permits does not change from year 1 (that is, your
answer from part (b))
policy (ii) Charge a per unit tax rate consistent with the new MAC curve.
Under which policy does the government attain more revenue?
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Question 6
Suppose that several firms are polluting the air in the southeast region of Sylvania. The marginal damage
costs arising from this pollution are MDC = -20 + 8 e.
The marginal abatement costs are
MAC = 840 - 12 e.
a.
Determine the optimal level of emissions.
b. Suppose that the pollution in this region is caused by only two firms. Praline’s Products
currently emits 22 units and has a marginal abatement cost function of
MACp = 7Xp
where Xp represents the emissions reductions for Praline’s Products.
The other polluting firm is McKay’s Manufacturing whose marginal abatement costs are given by
MACm = 2Xm,
where Xm represents the emissions reductions for McKay’s Manufacturing.
McKay’s Manufacturing currently emits 48 units.
Determine the cost effective allocation of pollution between the two firms.
Draw a diagram illustrating the allocation of pollution between the two firms.
c.
A local analyst, Anne Elke, states, “Since the marginal abatement costs for Praline’s Products
are 3.5 times larger than the marginal abatement costs for McKay’s Manufacturing, Praline’s
Products emissions reductions should be 3.5 times larger than the emissions reductions for
McKay’s Manufacturing.” Do you agree? Use your diagram from part (b) to explain your
Answer.
Question 7
In Anviliania, where porcelain lupines are made, the Anvilianian Bureau of Science has discovered that
the water has a concentration of pollution that is 4 times greater than the minimum health standard. As
a result, the government has decided to impose an ambient standard that is 1/4 of the current
concentration level. Note that rivers and lakes in Anviliania have a background concentration of 5.
In Anviliania, there are two firms that produce porcelain lupines and thereby the water pollution. Firm
1's abatement costs are given by MAC(1) = 3.5X1
where X1 is the units of emissions reduction for firm 1. With no policies in place, firm 1 would emit 39
units of pollution.
Firm 2's abatement costs are MAC(2) = 1.8 X2, and with no policies in place firm 2 would emit 75 units
of pollution.
Firm 1 is closer to urban centers and thereby has a transfer coefficient of 1. Firm 2's transfer coefficient
is o.8.
a.
Determine the cost effective allocation of emissions reductions for firm 1 and firm 2.
b.
If the government used a permit policy to achieve the ambient standard, how many permits
should it give to firm 1 and how many should it give to firm 2?
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Question 8
Consider the following taken from The Edmonton Journal
EDMONTON - Shell Canada came out swinging at critics of its proposed $12-billion Jackpine oilsands
mine expansion, which calls for diversion of the Muskeg River and construction of a new lake to
compensate for loss of fish habitat.
The project, 100 kilometres north of Fort McMurray, would bring in $17 billion in taxes and royalties
over its lifespan and create 750 permanent jobs, Shell lawyer Shaun Denstedt said in final arguments to
the joint review panel, consisting of Alberta Energy Resource Conservation Board and federal officials.
The project is “overwhelmingly in the public interest” and would “enhance Canada’s energy security,”
and Shell could take steps to mitigate environment damage through future monitoring, Denstedt said.
Denstedt criticized environmentalists such as renowned water expert David Schindler. His statements
concerning acid deposits in area lakes are “false” and the University of Alberta scientist also took some
statements “out of context” and “ignored” another study when he gave evidence on water quality to the
panel earlier this fall, Denstedt told the panel.
The Shell project to expand an existing mine made headlines earlier this fall when the company’s own
environment report pointed to a substantial loss of habitat for birds, caribou and other species, as well as
serious air quality issues if all planned oilsand projects proceed, including the Jackpine expansion.
But Shell urged the review panel not to consider these so-called cumulative effects on the environment
when looking at the Jackpine project. It should only consider the much more limited environmental
footprint associated with the mine expansion itself, which will add another 100,000 barrels a day to
production.
“This project is not likely to cause any significant environmental effect that cannot be mitigated,” said
Denstedt.
Okay, first, everyone pause for a moment of absolute disbelief.
Now suppose you have been hired to do a benefit cost study of this proposed mine expansion. The
benefits of the mine have been stated above by a lawyer from Shell. (Other proponents of the mine have
stated that expansion of the mine will also cause everyone to happily sing the Surfin Bird song, make
sauerkraut taste better and eliminate erectile dysfunction.)
Your job is to measure the costs of this project.
What method (or methods) would you use?
Carefully explain your choice and discuss some of the issues that you expect to encounter in this study.