Econ 343, Environmental Economics
Exam #1, Fall 2015
Stonebraker
Name _______________________________
1.
(10%) Officials are studying whether to build a new park along the Catawba River. They want to
identify use values, option values and non-use values of the park. Give a reasonable example of each
and briefly explain.
2.
(10%) Five firms are each producing one ton of carbon monoxide pollution. The MC for each firm to
eliminate its pollution is given below:
Kinard Kandy:
Econ Éclairs:
Palmetto Pies:
Carolina Cakes:
Diggs Donuts:
MC = 20
MC = 28
MC = 52
MC = 37
MC = 12
Economists have estimated the marginal benefits of eliminating pollution given below:
MB of 1st ton eliminated:
MB of 2nd ton eliminated:
MB of 3rd ton eliminated:
MB of 4th ton eliminated:
MB of 5th ton eliminated:
70
60
50
40
30
How many tons of pollution should be eliminated? Why? Explain clearly.
3.
(7%) We have been asked to provide water to assist aliens in colonizing a nearby galaxy. For an
upfront cost of $500 million, we can build a reservoir from which their spaceships can siphon water
over a period of three years. The aliens will pay us $400 million per year for the water at the end of
each of the next three years. After the three years we can destroy the reservoir and restore the
environment at a cost of $300 million. If no other costs or benefits are relevant and the discount rate
is 3%, write out the equation for the net present value of this venture. Do not calculate the total.
4.
(6%) A firm has two projects with identical present values. Project A will not generate profits for at
least five years. Project B will generate profits more quickly. If the firm recalculates the present
values using a higher discount or interest rate, which project will have the higher present value?
Explain the economic logic
5.
(3%) What is the Second Law of Thermodynamics?
6.
(14%) Suppose that raising chickens creates pollution that imposes external costs on others. Draw an
appropriate graph to illustrate the difference between the quantity of chickens that will be bought and
sold in a competitive market and the quantity that would be allocatively efficient. Label clearly.
Identify the deadweight welfare loss that will occur and explain.
7.
(4%) Differentiate between the anthropocentric and ecocentric approaches to valuing environmental
assets.
8.
(10%) Suppose Trump, Inc. estimates a MC of $40 for producing a good that is worth $44 to
consumers. However, for each unit produced, Trump, Inc. dumps enough toxic waste in a river to
cause $6 of external costs to others.
a. According to Coase, what will happen?
b.
Explain why Coase’s solution might not work well in the real world.
9.
(10%) What is contingent valuation? Explain two of the likely biases of using the method.
10. (7%) Why might economists argue that it is difficult to determine who should pay to correct an
environmental problem? Give a relevant example and explain.
11. (7%) State transportation officials have concluded that better highway guard rails could save 10 lives
per year. Pronouncing that life is priceless, Governor Gummybrains has ordered the officials to spend
"whatever it takes" to make these improvements. Use your economic wisdom to explain why
Gummybrains is making a mistake.
12. (12%) Explain the Economic Theory of Regulation and use it to explain why government regulations
will not always be in the public interest.