Economics of the Environment Exercises

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Exercises I. Essay Questions 1. Describe what economists mean by a. Existence value b. Safety standard c. Contingent evaluation d. Command-and-control legislation e. Economic efficiency 2. What are the differences between existence, use, and option values? Give examples for each. 3. According to one study, the maximum price elasticity for mpg is 0.21, meaning that a 1% increase in price leads to 0.21% increase in fuel economy. How much should the price of gasoline be increased if we desire to achieve a 10% increase in automobile fuel efficiency? 4. Jill and Jack are sharing an office in a manufacturing firm. Jack is a smoker and claims much more relaxed and productive if he smokes three cigarettes a day. Jill hates smoking and claims that she cannot handle the smell of even a single smoke. Assume that there is no regulation that bans smoking in the office, who is right? Is there a point where a compromise can be reached? 5. Should smoking be banned in public places? If yes, should imposing the ban be the responsibility of a government agency? Should it be decided through voting? 6. A new landfill in your neighborhood is expected to raise the cancer rate by 1 in 1000 during your life time. To reduce the risk to 1 in 10,000, new monitoring and safety equipments have to be installed which will cost $100 million. To pay for the cost, your property tax must be increased by $1 a month. Would you pay for it? What if higher costs necessitated an increase in property tax of $10 a month? $50 a month? $100 a month? 7. A wireless telephone company needs to install their high-frequency, high-voltage transformers on the rooftop of your building. They offer you a flat fee of $10,000 for the right to install their equipment. Would you take it? There is some research that indicates a 1% increase in the rate of cancer for people living nearby these transformers. Would your neighbors have the right to sue you if you accepted the company’s offer? 8. The same company wants to install a second unit in a poor neighborhood of the city. The company offers $2,000 for obtaining the right. Is this fair? What if the neighborhood voted to accept the offer? 9. Discuss three methods of encouraging automotive fuel efficiency. What are the advantages and disadvantages of each? 10. What is the globalization and its effect on the environment? Is the overall trend positive or negative? How has globalization affected your community? II. Multiple Choice Questions 1. On the basis of the traditional economic theory a. The cleaner the environment is, the more sustainable economy will be b. Cost of environmental cleanup is a major drag on economy c. Society must bear a certain amount of pollution d. Pollution is a good that follows the law of supply and demand e. Both c and d 2. When it comes to the environmental protection, efficiency standard advocates believe that a. Personal safety is the innate right of every individual, and no matter the cost, must be guaranteed b. The marginal cost of reduction drops per unit of reduction in pollution c. The marginal benefit of reduction increases as air gets cleaner and cleaner d. An efficient market is a market in which demand and supply are in balance e. All of the above 3. The unknown potential benefits of the 436 environmental protection are called a. Use value b. Option value c. Existence value d. Hidden value e. Contingent value 4. Which of the statements below is consistent with the operation of a profit-maximizing firm in a competitive market that does not penalize polluters no matter how much they pollute? a. Consumers pay the full social cost of production. b. Consumers pay only the external cost of production. c. Consumers pay only the external marginal cost of production. d. Consumers pay less than the socially efficient price since producers are subsidized by society. e. None of the above. 5. Which of the following is consistent with the command-and-control regulation? a. Taxing producers equal to the external cost created by their pollution. b. Requiring firms to lower their pollution level according to best available control technology. c. Requiring firms to reduce their pollution level to zero. d. Requiring firms to buy pollution permits to offset their pollution. e. Requiring firms to pay a penalty equal to the external cost of pollution. 6. Which of the following statements is not correct? a. The economical benefits of environmental protection can be measured only by its monetary benefits. b. Hedonic regression implies the pleasure one gets from an improved environment. c. Non-market benefits of environmental protection can be estimated by people’s willingness to pay for those benefits. d. The willingness to accept compensation for some level of pollution is called contingent evaluation. 7. Suppose two firms A and B each produce 10 tons of emission every month. The local city council passes a bill that requires total monthly emission to be reduced by 8 tons. It costs firm A $5 and firm B $20 to cut emissions by one ton. The most efficient way to comply with the ordinance is for emission trading that results in a. Firms A and B negotiating to trade emission permits b. Firm A cutting emission by 8 tons c. Firm B cutting emission by 8 tons d. Each of the firms A and B cutting emissions by 4 tons e. Both a and b 8. In the example above, assume that the law sets a maximum particulate emission of 12 tons per each firm. What is the optimally efficient cost of pollution abatement? a. $ 60.00 b. $ 90.00 c. $ 130.00 d. $ 240.00 e. Not enough data is given. 9. The main advantage of control-based regulations is that a. Because it excludes or relaxes fines on old sources, the cleanup costs are less b. Because regulation is based on imposing the best available control technology, there is great incentive for firms to spend money on R&D activities c. It allows old industries to survive and thus hire new employees d. It provides incentives to those who help improve air quality and reduce emissions e. All of the above 10. Which of the following statements is correct? a. Both control-based and incentive-based regulations provide incentives to firms to reduce emissions. b. Tradable pollution permits allow same amount of reduction in pollutant levels, but at a lower cost. c. The main problem with incentive-based 437 Chapter 16 - Economics of the Environment regulation is the creation of hot spots. d. Tradable pollution permits encourage firms to invest in control abatement technology to make additional money by selling their permits to dirtier firms. e. All of the above. 11. The main objection raised against incentive-based regulations is that a. Penalties cannot discourage firms from polluting b. Localized hot spots may appear c. It is always possible to buy permits at a lower cost than it takes to install new pollution control equipment d. It offers the opportunity to sell permits given out free e. All of the above 12. Which of the following statement(s) is/are correct? a. Proponents of safety standards believe that polluters must pay for the pollution. b. Safety standards remove incentives for polluters to free ride. c. Safety standards are inefficient. d. All of the above. e. a and b, but not c. 13. Non-market value of the yet-unknown potential benefits of a resource is called a. Use value b. Option value c. Existence value d. Utility value e. A charity 14. ____________________ see protecting the environment as a moral issue. a. Hedonists b. Utilitarians c. Environmental ethicists d. Existentialists e. Environmentalists 15 On the basis of efficiency standards, which of the following can justify subsidizing the development of a hydrogen infrastructure? a. The funding for hydrogen research has been increasing in the last few years. b. The hydrogen sector has a strong lobbying presence in Washington D.C. c. Switching to hydrogen reduces our dependence to foreign oil and is therefore a positive externality. d. Hydrogen is a necessary component for fuel cell operation. e. All of the above. III. True or False 1. A competitive market is Pareto efficient. 2. The main drawback of traditional command-and-control regulation is that it is not economically efficient. 3. Incentive-based regulation is superior over command-and-control regulation because it benefits society by generating the same level of pollution at a lower cost. 4. A Pareto efficient market is one that assures the seller is better off than the buyer as a result of a trade. 5. Zero pollution is fundamentally in-compatible with an efficient market. 6. Environmental protection necessarily brings about a certain number of job losses. 7. In the last few years, the majority of US job losses have been due to increased competition from low wage foreign workers. 8. An environmental ethicist considers the environment valuable because it is the source of happiness to him and others. 9. An example of socially efficient practices is a subsidy to educational systems, because it promotes literacy which is a positive externality. 10. The environment of the Former Soviet Union was 438 considerably cleaner than that of western countries because firms had no profit motives to produce pollution. IV. Fill-in the Blanks 1. According to the _________ theorem, it does not make any economic difference who pays for the pollution, the polluters or the victims. 2. __________ advocates disagree with the Coase hypothesis and argue that polluters, not victims, should pay for the cleanup. 3. The __________ see the value of the environment only as long as it brings them happiness. 4. Polling people to find their willingness to pay for a product is called _______________. 5. The environment is a ________ good and is therefore subject to the same law of _______ ____________ as other goods. 6. The enjoyment one gets from a cleaner beach, enjoying water sports, and a greener park is examples of the ____________ benefits of environmental cleanup. 7. In the United States environmental regulations are usually mandated by _____________. 8. The agency responsible for implementing US laws on environmental protection is ____________. 9. Under command-and-control strategy, to control emissions, firms are required to deploy the __________________ . 10. An area near a source where there is an elevated concentration of pollution is called a _________.