EC371 midterm examination outline. Summer 2025.

Department of Economics.

General information: Midterm is scheduled in class on June 3. The time of the exam is 75 minutes.

Students are allowed to bring one hand-written help sheet, one sheet of paper (stapled multiple sheets are not allowed), double-sided, any size. Printed or photocopied or written by someone else help sheets will not be allowed.

No phones and no smart watches, please..

Question format: The essay questions of the exam will be administered on paper (accounts for the 50% of the exam score), while the problem set(s) will be administered online (accounts for the 50% of the exam score), so please bring your laptops to the exam. There will be the help sheet allowed (requirements: only one sheet of any size, handwritten by students themselves only; no photocopies and no printouts).

The midterm review is scheduled in class on June 2 at 4.30pm-7pm (in KCB 104, our regular classroom).

My best wishes for the exam!

What to read:

1) Chapters 3, 6, 8, 9.1-9.4 in Harris&Roach textbook.

2) Lecture notes and research papers on Blackboard.

3) Homework assignments – solutions (Blackboard , just click on homework test link).

4) Practice tests and quiz solutions (on Blackboard).

Concepts to focus on:

Chapter 3 and its two appendices:

•    Externalities, definitions and types of externalities;

•    Externalities as a market failure - market failure due to externality is a failure of the price mechanism to deal with external costs or external benefits resulting in a net social loss, overproducing under the negative (pollution) externality and underproducing under positive externality (i.e., ecological services provided by wetlands);

•    Internalizing externalities via various policy tools (specific tax, quota, subsidy);

•    Why reducing pollution levels to zero is unlikely to be economically efficient - use a graph showing a marginal benefit curve and a marginal cost curve to support your explanation (see the problem sets after chapter 3 in your textbook);

•    A per unit pollution tax (Pigovian) and a per unit subsidy as policy tools to internalize an externality;

•    The upstream tax – meaning and goal;

•    Major reason why the profit tax would not be a correct tool to internalize a pollution externality;

•    Be able to provide some examples of positive and negative externalities.

•    Graphical representation and computation of the areas corresponding to marginal and total external

costs, marginal private costs, marginal social costs, marginal private benefits, marginal social benefits; net social loss (deadweight loss), net social gain, market equilibrium;

•    Two approaches to compute the social welfare in a graph of supply and demand (TWTP-TC = SW=CS+PS)

•    Market failure as deviation from social efficiency;

•    Efficiency as maximization of total net benefit (i.e., of the sum of consumer and producer surpluses).

•    Holdout and free rider effects – definitions and examples.

•    Efficiency and DWL under competition versus under monopoly: with and without pollution externalities

•    The problem sets after chapter 3 in your textbook.

•    The Coase theorem and its assumptions (i.e., wealth effects and transaction costs are both zero);

•    Transaction costs – definition (costs of reaching an agreement and costs of negotiating);

•    An example of the application of the Coasian theory in recent environmental policy making.

•    Equity implications and Coasian approach to environmental externalities

Chapter 6.

What is non-market valuation; description of the following methods – replacement cost; contingent valuation method; travel cost method; hedonic price method.  Why do we need non-market valuation; which methods are direct and which are indirect– hedonic price; contingent valuation; travel cost methods? Three types of value, definitions and examples; willingness to pay and total economic value. Which non-market valuation method is capable of estimating use values and which – non-use values? Why the study of Lumpinee park in Bangkok utilizes two valuation methods (because the combination of the methods allows to obtain estimate of both, use and non-use values of the park).

Chapter 8

Taxonomy of pollutants (both lecture notes and textbook). How do the marginal costs of pollution control and the marginal costs of pollution damage change as pollution levels decrease – graphical representation of the equimarginal principle (i.e., balancing MB & MC to obtain an efficient outcome). Pollution policies comparison (preference for quantity-based (regulatory standards & cap&trade system) over price-based (taxes) policies if pollutants are toxic or hazardous (methyl mercury that can cause a serious nerve damage) to avoid local hotspots (locally high levels of pollution surrounding a high-emitting plant); [note: somewhat confusing discussion in the book – suggests using tradable permits for methyl mercury; what is needed – a strict pollution standard]; technology-based regulation policies requiring firms to use a specific type of technology). Tradable permits: advantages and drawbacks; Pollution taxes & subsidies - advantages and drawbacks; Regulatory approach (i.e., Uniform. Emissions Standards) - advantages and drawbacks. The impact of technological change on pollution taxes and tradable pollution permits. Problem set after the chapter (homework answers are on BB in the test format).

Chapter 9 (sections 9.1, 9.2, 9.3, 9.4 only)

The definition of natural capital (i.e., the available endowment of natural resources including land, minerals, forests, water, soil air, fisheries, wildlife, ecological life-support systems (such as wetlands)). Concepts related to accounting for changes in natural capital in national accounting (gross investment = adding to productive capital over time; net investment = gross investment minus depreciation (monetary deduction in national accounting for the wearing-out of capital over time); natural capital depreciation =  monetary deduction in national accounting for loss of natural capital such a reduction in in the supply of timber, wildlife habitat , or mineral resources.) Example of a question: Cutting down forests and converting them to timber enter the national income accounts as a positive contribution to income, equal to the value of timber … Does the existing system of national accounting in the USA account for the loss of standing forest as an economic resource? Does the existing system of national accounting in the USA account for the loss of standing forest in terms of its ecological value? The concept of substitutability of natural and human-made capital (the ability of one resource or input to substitute for another; in particular, the ability of human-made capital to compensate for natural capital depletion); the concept of complementarity of natural and human-made capital (the property meaning that both, human-made capital and natural capital, are needed for effective production/consumption); The general principle of natural capital sustainability (conserving natural capital by limiting depletion rates and investing in resource renewal). 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.