ECO 3620. Environmental Economics

Exam #1 Study Guide

The exam will consist of 6 open ended questions chosen randomly from the following 10 questions. You will be asked to answer 4 of the 6 questions.

1. Explain each of the following statements using a supply and demand diagrams and a sentence or two (crude oil accounts for about 50% of the cost of gasoline production).

1. When a hurricane strikes the Gulf of Mexico the price of gasoline rises.
2. When the weather turns warm in the U.S. the price of gasoline rises. 
3. A new tax on the miles that each car is driven causes the price of gas to fall (assume new technology leads to a gadget that is attached to your odometer).
4. When the Artic National Wildlife Refuge is drilled for oil the price of gas falls.

2. Suppose there is an urban area and everyone in the city buys gasoline so that they can drive cars. Driving cars generates ozone (i.e., smog). Ozone can irritate the respiratory system, reduce lung function, aggravate asthma and lead to other health problems.

1. Draw the market for gasoline, labeling the demand curve, the marginal social benefit curve, the supply curve, the marginal social cost curve, the market equilibrium level of output, and the efficient level of output.
2. Is the efficient level of gasoline (i.e., pollution) zero? Explain.
3. Suggest an environmental policy that can be used to achieve the efficient level of gasoline.

3. In Krutilla's famous 1967 article "Conservation Reconsidered" he argued that the economic problems association with the environment and natural resources were changing. Less concern should be devoted to the world's running out of natural resources for the production process and more concern should be devoted to environmental amenities.

1. Use a production possibilities frontier to illustrate his argument. Consider a forested area. Put market goods from the forest on the vertical axis (e.g., timber) and nonmarket goods on the horizontal axis (e.g., recreation).
2. Krutilla also introduced the concept of existence value. Define existence value. Write an equation for total value to show the  importance of existence value relative to use value.

4. Suppose there is an urban area and everyone in the city drives cars that generate ozone (i.e., smog). Ozone can irritate the respiratory system, reduce lung function, aggravate asthma and lead to other health problems.

1. Is the efficient level of ozone zero? Illustrate the efficient level of ozone abatement using the marginal benefit-marginal cost diagram.
2. Suppose a firm develops new technology for reducing auto emissions. Illustrate the impact of the new technology on the efficient level of ozone abatement.
3. Suppose income of the residents substantially increases and health is a normal good. Illustrate the impact of the income increase on the efficient level of ozone abatement.

5. Here is the text of a recent announcement from the US Department of Commerce: "NOAA's National Ocean Service is planning a survey to collect information on the value of Hawaii's coral reef habitats to specific segments of the U.S. population. This is a national survey using a panel based on a nationally representative, list-assisted, random digit-dial sample drawn from all 10-digit telephone numbers in the United States. The survey is designed to yield information that can be used to estimate non-use or passive economic use values for Hawaii's coral reef ecosystems. The survey addresses the public's preferences and economic values regarding the use of no-take areas as a management tool and their preferences regarding alternative methods of restoring damaged coral reefs."

1. What valuation method is the announcement describing? Is this a stated preference or a revealed preference method?
2. Describe four problems that NOAA must confront in order to estimate valid benefits of coral reef protection.

6. Consider a state park that has excellent rock climbing areas. Climbing routes are open from April to September.

1. Illustrate the relationship between rock climbing trips to the state park and travel cost. Show the consumer surplus (i.e., benefits of these trips). Describe this relationship.
2. Illustrate graphically and describe the effect on demand and consumer surplus of the following events:
1. A rock climbing gym opens nearby.
2. The state park extends the climbing season to include March and October.

7. Consider two urban areas located in the same region of the U.S. Everything about these cities is identical except that the Department of Energy has just announced that a new low level radioactive waste repository is nearby one of the urban areas, call it Sin City (i.e., Las Vegas). Call the other city something else.

1. Illustrate the housing and labor markets in both cities before the announcement.
2. Illustrate the housing and labor markets in both cities in the years after the announcement.
3. Describe the total willingness to pay to avoid living in Sin City as revealed through the housing and labor markets.

8. Consider an environmental policy that might reduce involuntary health risk and prevent 3000 premature deaths annually.

1. Suppose that workers require a $600 annual wage premium to accept an increased risk of job-related death of 1 in 10,000. What is the value of statistical life implied by this labor market outcome? What are the benefits of the environmental policy?
2. The policy addresses an involuntary risk but the labor market process deals with voluntary risk. Describe the difference in these two types of risk and how the difference might affect the measurement of the benefits of the environmental policy.
3. Suppose that only individuals that are risk-loving are attracted to this labor market. Describe how this fact should be considered when evaluating the benefits of the environmental policy.

9. Consider the goal of efficiency.

10. Threatened and endangered (T&E) species provide existence values. The U.S. Endangered Species Act (ESA) regulates land use on endangered species habitat. Sometimes when T&E species are found on property, property owners take preemptive action in order to avoid ESA regulation. Here is a North Carolina example where landowners cut down their trees in order to maintain their development option when red-cockaded woodpeckers are found.

1. Draw a graph of the marginal benefits (i.e., existence value) and marginal costs of habitat protection (i.e., lost income from the land). Illustrate the efficient level of habitat protection.
2. Suppose the landowners have property rights to their land. In other words, the government does not have the legal authority to regulate land/habitat use. How could the government harness the forces of the Coase theorem to achieve an efficient outcome?
3. Suppose the landowners do not have property rights to their land (i.e., the current situation). How could the government harness the forces of the Coase theorem to achieve an efficient outcome?
4. Assume that preemptive development does not occur and transactions costs are zero. Does it matter, in terms of efficiency, who has the property rights? Explain.
5. Discuss the problems of transactions costs.