EC371 midterm review (ch 3, 6, 8, 9.1-9.4 + study of the value of Lumpinee Park in Bangkok).
Note: Midterm HELP SHEET is encouraged: handwritten only; one sheet of paper of any size; can be two-sided.
Check if you feel comfortable explaining the concepts from the exam outline on blackboard under the midterm materials folder. Take the online practice test on blackboard (not for a grade).
Chapter 3
1. Pollution: internalizing negative externalities
Students should understand the potential and the limitations of internalizing externalities. An important point is that all externalities cannot be internalized, and to be able to differentiate between instances where externalities can and can’t be internalized (examples?). Note: pollution externalities will be difficult to internalize fully when transactions costs are high or when estimates of social costs and benefits are unreliable.
The idea of an “optimal” pollution level is based on the idea that reducing pollution to zero is an unrealistic idea. Students should realize that eliminating pollution to zero carries significant opportunity costs. From there, a discussion of the costs of eliminating pollution plays the dominant role in defining the “optimal” pollution.
2. Pigouvian tax as a primary policy to combat market failure associated with pollution. Tax per unit versus a percentage tax – which one is a Pigouvian tax and why? What does it mean that the Pigouvian tax is imposed upstream the production process?
3. Coase Theorem: critical assumptions
a) The Coase Theorem can be illustrated using MC of pollution for a downstream farmer or community while MB of pollution could represent a factory owner. Set up the graphical scenario and go through negotiation to reach a mutually beneficial agreement.
b) The discussion of the free rider effect in the context of pollution externalities and negotiations.
Examples of the free rider issues observed in relation to many environmental issues such as community negotiations against factory emissions.
c) While the distribution of property rights does not affect efficiency when applying the Coase Theorem, rights are relevant in considering equity. The issue of equity plays critically important role in the applications of Coase’s bargaining approach. For example, who should have the property rights in specific cases such as a factory polluting a neighborhood, a driver responsible for automobile emissions, and a developer seeking to build houses on a wildlife habitat.
4) Positive externalities: amenities and why having an amenity can be associated with market failure (i.e., market equilibrium is not efficient when positive externality is present). Explain how a subsidy can increase economic efficiency in the case of a positive externality. Use a supply-and-demand graph to support your explanation.
Chapter 6:
1. Types of value: use, nonuse, option.
Students should understand the difference between use, non-use values and be able to provide an example of each
2. Types of non-market valuation methods.
Example of each method application to Lumpinee park.
3. Externalities: the effect on different types of values.
Example of true/false question with a comment:
Externalities may involve changes to both use and nonuse values. Is it true or false?
Answer: … .. Comment:
…..
Chapter 8:
1. Types of pollution: taxonomies of pollutants.
Students should understand the potential and the limitations of each pollution abatement policy considered in chapter 8 (e.g., tax, cap&trade, standards, zoning)
2. Types of pollution abatement policies and their characteristics (cost-effectiveness, flexibility, accuracy in achieving a specific pollution reduction goal). Students are encouraged to put table from chapter 8 in their help sheets.
Examples of multiple-choice questions (students will be asked to provide a brief comment):
1. As emissions levels stabilize for a stock pollutant ...
a) health and other impacts also stabilize.
b) health and other impacts begin to decrease.
c) health and other impacts continue to increase.
d) health and other impacts may increase or decrease.
e) health and other impacts are reduced to zero.
2. As emissions levels increase at a steady rate for a stock pollutant, accumulations ...
a) decrease at a steady rate.
b) decrease at an exponential rate.
c) remain constant.
d) increase at a steady rate.
e) increase at an exponential rate.
3. Which of the following is an example of a global pollutant?
a) Chlorofluorocarbons (CFC’s)
b) Ground Ozone (O3)
c) Carbon monoxide (CO)
d) Nitrogen oxides (NOx)
e) Sulfur dioxide (SO2)
4. A pollution tax would be preferable to a system of transferable permits when...
a) The marginal costs of damage are steep and the marginal costs of control are relatively stable
b) The marginal costs of damage are steep and the marginal costs of control are steep
c) The marginal costs of damage are relatively stable and the marginal costs of control are relatively stable
d) The marginal costs of damage are relatively stable and the marginal costs of control are steep
e) The marginal costs of damage are elastic and the marginal costs of control are elastic
5. Which one of the following statements is false?
a) Technological progress will lower the price of tradable pollution permits.
b) Under a pollution tax, technological progress will reduce overall pollution levels.
c) Under a system of tradable permits, technological progress will reduce overall pollution levels.
d) A pollution tax creates an incentive for technological progress.
e) Under a system of tradable permits, technological progress can result in some firms increasing their pollution levels.
6. Tradable permits are likely to result in less inefficiency, relative to a pollution tax, when ...
a) the marginal costs of damages are steep and the marginal costs of pollution reduction are relatively stable.
b) the marginal costs of damages are steep and the marginal costs of pollution reduction are steep.
c) the marginal costs of damages are relatively stable and the marginal costs of pollution reduction are relatively stable.
d) the marginal costs of damages are relatively stable and the marginal costs of pollution reduction are steep.
e) the marginal costs of damage are elastic and the marginal costs of pollution reduction are also elastic.
For Questions 7-9 refer to the graph below.
7. The graph above shows the marginal pollution control costs per ton for a firm that would pollute at Qmax without any regulation. Suppose a pollution tax of T1 per ton were implemented, with the firm reducing pollution to Qtax . What area(s) would represent(s) the tax paid by the firm?
a) A
b) A+B
c) B
d) A+B+C
e) B+C
8. The graph above shows the marginal pollution control costs per ton for a firm that would pollute at Qmax without any regulation. Suppose a pollution tax of T1 per ton were implemented, with the firm reducing pollution to Qtax . What area(s) would represent(s) the firm’s pollution reduction costs, not considering the taxes it pays?
a) A+B
b) A+B+C
c) B+C
d) C
e) D
9. The graph above shows the marginal pollution control costs per ton for a firm that would pollute at Qmax without any regulation. Suppose a pollution tax ofT1 per ton were implemented but the firm did not reduce its pollution from Qmax . What area(s) would represent(s) the tax paid by the firm?
a) C+D
b) B+C+D
c) B
d) B+C
e) A+B+C+D
For Questions 10-11 refer to the graph below.
10. The graph above shows the marginal pollution control costs per ton for a firm. Suppose a pollution tax of T1 per ton were implemented, with the firm reducing pollution from 100 to 30 tons. What area(s) would represent(s) the tax paid by the firm?
a) A
b) A+B
c) B
d) C
e) C+D
11. The graph above shows the marginal pollution control costs per ton for a firm. Suppose a pollution tax ofT1 per ton were implemented, with the firm reducing pollution from 100 to 30 tons. What area(s) would represent(s) the firm’s pollution control costs, not considering the tax it pays?
a) A
b) A+B
c) B
d) B+C
e) B+C+D
Chapter 9.1 – 9.4: Principles of ecological economics.
Note that the boundary between traditional natural resource and environmental economics and ecological economics is not well-defined. One of the major differences between traditional and ecological economics is the emphasis on macroeconomic scale. Ecological economists generally believe that market-based measures are insufficient to limit scale to optimal levels and explicit measures are required.
Ecological economics stresses a systems perspective, and attempts to understand economic activity in terms of the physical and biological principles of ecosystems. But this does not necessarily mean that traditional environmental economics does not utilize biological principles in the economic models (we will consider the model of fisheries in chapter 18, which combines marine biology and economics in one model).
Ecological economists do not entirely deviate from traditional analysis. Many aspects of ecological economics are based on the extension of mainstream economic theory to the areas of sustainable economic development.
The concept of substitutability of natural and human-made capital and alternative concept of complementarity of natural and human-made capital
The difference between strong (does not allow for any kind of substitution between natural and human-made capital, and therefore, natural capital levels should be maintained) and weak (allow for some substitution between natural and human-made capital and therefore natural capital depletion is justified as long as it is compensated for with increases in human-made capital) concepts of sustainability.
Examples of multiple-choice questions:
1. Which one of the following is not an example of natural capital?
a) The ozone layer
b) A river
c) A road
d) Soil
e) Air
2. The process of adding to productive capital over time is referred to as ...
a) capital depreciation.
b) net disinvestment.
c) physical accounting.
d) net investment.
e) strong sustainability.
3. Which one of the following statements is false?
a) The economically optimal level of pollution based on standard environmental economics is always less than the absorptive capacity of the environment.
b) Standard economic theory generally assumes substitutability between resources.
c) Satellite accounts can indicate the abundance or scarcity of natural resources over time.
d) Cutting down forests is an example of natural capital depreciation.
e) Complementarity suggests that both natural and manufactured capital are necessary for production.
4. The combined input and waste flows in a system is called ...
a) absorptive capacity.
b) scale.
c) throughput.
d) strong sustainability.
e) weak sustainability.
5. The human economic system is generally considered to be a(n) ...
a) closed system
b) open system
c) strong system
d) weak system
e) optimal system
6 NOT ON THE EXAM I DISAGREE. The global ecosystem (except for solar energy) is generally considered to be a(n) ...
a) closed system
b) open system
c) strong system
d) weak system
e) optimal system
7. Which one of the following economists has argued that the ecosystem imposes scale limits on the human economic system?
a) Herman Daly
b) John Hicks
c) David Ricardo
d) Adam Smith
e) John Maynard Keynes
8. Which one of the following statements is true?
a) Strong sustainability assumes that most resources can be substituted for one another.
b) Strong sustainability is easier to achieve that weak sustainability.
c) Instituting strong sustainability would require extensive government intervention in markets.
d) Strong sustainability is aligned with traditional economic theory.
e) Strong sustainability dictates that no non-renewable resources be used.
9. Which one of the following statements about sustainability is false?
a) Weak sustainability could allow a country to reduce its forest cover over time.
b) Weak sustainability assumes that human capital can substitute for natural capital.
c) Strong sustainability seeks to maximize human welfare over time.
d) Strong sustainability would maintain natural capital stocks.
e) Weak sustainability would require government intervention.
10. How does humanity’s current ecological footprint compare with the available land on the planet?
a) Humanity’s ecological footprint is about 25% of the available land.
b) Humanity’s ecological footprint is about 85% of the available land.
c) Humanity’s ecological footprint is about 120% of the available land.
d) Humanity’s ecological footprint is about 165% of the available land.
e) Humanity’s ecological footprint is about 260% of the available land.
11. Standard economic theory generally assumes that ...
a) humans are in a “full-world” stage of development.
b) there is a scale limit to the growth of the economic system.
c) natural capital depreciation needs to be incorporated into national accounts.
d) throughput should be minimized.
e) resources are substitutable.
12. What type of sustainability is generally associated with standard economic theory?
a) Open sustainability
b) Closed sustainability
c) Weak sustainability
d) Strong sustainability
e) Optimal sustainability
Examples of essay questions:
1) What is natural capital depreciation? List and briefly discuss three ways to incorporate natural capital depreciation into national accounting and policymaking.
2) What is meant by the “optimal scale of the macroeconomy”? How do traditional and ecological economics differ on the issue of macroeconomic scale?
3) Do you agree that global ecosystem represents a closed system?
Example of a multiple-choice question that will not be on the exam (why?):
What comprises the largest share of humanity’s ecological footprint?
a) Agriculture
b) Forestry
c) Fishing
d) Urban development
e) Carbon emissions