ECON 3705: Environmental and Natural Resource Economics
Study Guide for Final
Major Topics:
Air pollution
-
Clean Air Act and NAAQS
i. Effectiveness, problems, (in)efficiency and cost (in)effectiveness
Acid Rain Program
i. Efficiency gains
ii. Pricing History and what it means as far as abatement costs
Climate Change
- Why is it a problem, Basics of science.
- Estimates of damages and costs
- What can be done?
- Policy Issues
- Kyoto protocol
- What it calls for and why it wasn’t ratified by U.S.
- What economists believe
- Effects of policy (winners and losers)
- Taxes vs. Permits
- Advantages and disadvantages of each
- Inefficiency with uncertainty (Metcalf paper)
Autos and Externalities
- Private costs and external costs associated with driving
i. Congestion, pollution, and accident externalities
ii. Basics amounts of each (Paper by Parry et. al.)
- Determining the optimal level/inefficiency area associated with private outcome
- MPG vs. GPM
- Policy options
i. Congestion taxes
ii. Gas taxes
iii. Subsidize public transit
iv. Vehicle Miles Traveled tax (pay as you drive insurance)
Toxic and Hazardous Wastes:
-Love Canal
-What differentiates toxic wastes from other types of pollutants
-Policy issues surrounding toxic waste
-Sources of market failure
-Voluntarily accepted risk and externally imposed risks
-CERCLA, Superfunds and Brownfields
-The 3 Major Questions
-Brownfield Initiative of 1995 and Brownfield Revitilization Act of 2002
-Performance Bonds
-The Delaney Clause
Sustainable development
-Solow’s Definition
-Counterevidence to the jobs vs. trees debate
-Population Growth, Economic Growth, Environmental Impact
-Porter’s Induced Innovation Hypothesis
NOTE: The final will be comprehensive, with approximately 1/3 of the questions based on material
discussed prior to the second midterm. Major topics that you will likely be asked about include: What
determines efficiency, calculating net benefits on a graph, externalities, public goods, non-market
valuation techniques, present value, basics of overpopulation command and control, pollution permits,
and taxes. PRACTICE PROBLEMS: As always, the questions are not exhaustive and are intended o get
you thinking about some of the topics that you’ll be asked on the exam. See you 5/7 at 8 am!
1. Use the following table on firms’ pollution emissions to answer the following questions.
Quantity of pollution abatement
1
2
3
4
5
Firm A’s MC of abatement
$20
$40
$60
$80
$100
Firm B’s MC of abatement
$5
$8
$20
$30
$40
Suppose the efficient level of abatement is 4 tons. How much should firm A and firm B reduce their
emissions in order to achieve this reduction at least cost? What pollution tax level would result in this
outcome?
Suppose the efficient level of abatement is 4 tons. How much should firm A and firm B reduce their
emissions in order to achieve this reduction at least cost? What pollution tax level would result in this
outcome?
2. Suppose two firms have abatement costs given by MAC1 = $25A and MAC2 = $10A.
a) If they both face a tax equal to $500/unit, by how much will each firm reduce their pollution?
b) If the government wishes to reduce pollution by 50 units in total. By how much should each firm
reduce their pollution in order to be cost effective?
3. When firms face a per-unit pollution tax, they have an incentive to ______ - estimate the MC of
controlling pollution. If they believe the government will implement a pollution permit system hey have
an incentive to ______ - estimate the MC of controlling pollution.
4. How does the Clean Air Act determine an acceptable level of a pollutant. Which of the 6 pollutants
that it measure has seen an improvement since it was enacted?
5. What are the reasons the Clean Air Act is largely believed to be inefficient? How could it be made
more efficient?
6. The Clean Air Act uses the “threshold concept” to determine the appropriate level of air pollution (the
NAAQS), and actually prohibits any estimation of benefits or costs in calculating these standards.
Explain why it is unlikely for the threshold approach to arrive at the efficient level of air pollution.
$
MD1
MD2
MC1=MC2
E
Emissions
7. Suppose the government applies a uniform level of abatement in two areas (1 and 2) denoted by quantity
A. Directly on the diagram above, label the efficient levels of abatement in each city with E1* and E2*.
Also label the inefficiency areas associated with the uniform abatement level.
8. How have the prices of sulfur dioxide permits changed since the A.R.P. program was implemented?
What are the major reasons for the changes?
9. Suppose a coal energy facility in New York buys 100 CO2 permits from a natural gas energy facility
in Connecticut at $3.50/permit. What can we infer about the abatement costs of each facility based on
this transaction?
10. What are the estimated damages in terms of worldwide GDP of climate change if nothing is done to
mitigate damages? What are the estimated costs in terms of worldwide GDP if Greenhouse Gas
Emissions are reduced by 75%?
11. Explain why more economists are in favor of reducing Greenhouse Gas Emissions than believe
climate change presents a significant risk to the economy.
12. Explain why Eric Metcalf found that a carbon tax is preferable to permits as a policy to deal with
climate change.
13. Explain why the Kyoto Protocol was not an effective global treaty and the major reason that it was
not ratified by the U.S.
14. Consider a city that has both a congestion problem (it does not have a congestion tax) and an auto
pollution problem (drivers do not pay for the pollution they generate).
a. Draw the private-trip-cost curve and the social-trip-cost curve.
b. Label the optimum volume V* and the equilibrium volume V0.
c. Label the associated inefficiency area on your graph.
15. Explain why any uniform policy on automobiles, such as a flat gasoline tax, will not be an efficient
way of dealing with either congestion or air pollution.
16. Suppose the demand for driving in a month for a driver is given by MPB = 10 – 0.1Q.
Private costs are constant at $3, and social costs are constant at $3.70.
a. How many miles will this person drive in a month?
b. What is the inefficiency associated with this amount of driving?
c. What is the efficient vehicle miles traveled tax to correct for this inefficiency?
17. Explain why increasing fuel efficiency in automobiles is not an efficient policy to address the
externalities associated with driving.
18. Briefly explain why Miles per Gallon is a flawed measurement to judge fuel efficiency.
19. How many gallons per 1,000 miles are saved as a result of improving fuel economy in a car from 30
miles per gallon to 40 miles per gallon? How many gallons are saved as a result of improving fuel
economy from 10 to 15 miles per gallon?
20. Explain why improving safety features in automobiles is not an efficient policy to address the
accident externality associated with driving.
21. Why do pay as you drive insurance (PAYD) policies address accident externalities associated with
driving better than flat insurance policies? Draw the graph representing MPC without PAYD, with
PAYD, the associated inefficiency area, and calculate the expected amount paid by drivers.
22. What are the three characteristics that differentiate toxic substances from other forms of pollutants?
What are the policy issues associated with addressing toxic substances?
23. Explain the difference between a voluntarily accepted risk and an externality imposed risk. If all the
risks associated with toxic substances are voluntarily accepted, does this mean there is no need for
government intervention? Explain.
24. What has the government done to clean up and encourage redevelopment of old contaminated sites
(brownfields and superfund sites)? What else could they do to promote further revitalization and prevent
further sites from becoming contaminated?
25. What are the 3 major questions policymakers must consider when dealing with the
remediation of contaminated sites?
26. What did the Delaney Clause require and what are the problems associated with it?
27. Provide two counterpoints (or statistics) to the argument that the economic growth is in conflict with
the environmental quality.
28. What is the standard definition of sustainable development? What is the Solow definition?