Department of Agricultural and Resource EconomicsARE 261
University of California at BerkeleyPeter Berck
Anthony Fisher
Fall Semester, 2006
ENVIRONMENTAL AND RESOURCE ECONOMICS
Final Exam
Exams must be returned to Peter Berck’s mailbox in 207 Giannini Hall by 5:00 p.m. on Monday, December 11. It should take no more than one day to complete the exam. Please type the answer to any question that requires a narrative answer. Please include sufficient words between the equations so that we can follow your reasoning.
Answer all questions.
1.(50 points) There are many ways to regulate pollution. Using simple models (of your choosing), discuss at least four ways of regulating. What are the advantages and disadvantages of each way? How do the ways that you suggest relate to the methods employed in the Clean Air Act?
2.(50 points) Derive an expression for the double-dividend problem using the Diamond-Mirrlees formalism. Like the Goulder article, you may use three goods—a clean good, a dirty good, and leisure/work. Let these be x1, x2, and x3. The production possibility frontier is as in Goulder, which is to say that it is linear. You make take the z’s as predetermined. Now calculate dq3/dq2 in terms of the change in total amount of taxes. Make your own estimate of what dq3/dq2 is likely to be, based on how big you think the dirty and labor sectors are and on any other information that you consider relevant. Calculate the change in welfare, V(q) – D(x(q)), from a change in q2. Now, think about the optimal tax solution. Is it the size of the tax wedge or the closeness to optimality that matters for the double dividend?
3a.(15 points) What is Solow’s “almost practical step” toward achieving sustainability? How does it fit into the broad general condition or criterion for sustainability? Explain how increasing levels of education and technical knowledge, investment in physical capital, and reduced capacity of environmental assets, along with net depletion of extractive resources, are related to sustainability.
b.(15 points) Explain the relevance of the concepts of substitution and technical change, and assumptions about these, to the Malthusian analysis and to the more recent Limits to Growth modeling.
c.(20 points) Explain why the commonly used indicator of impending resource exhaustion, the reserves/production ratio, is misleading. What are some other physical indicators, and what are their drawbacks? What are some economic indicators, and how have they behaved in empirical studies? How can you explain this behavior?
4a.(20 points) Describe the DICE model, explaining its main features (do not bother to list all of the equations though you might cite or reproduce one or more as relevant or to illustrate your description).
b.(20 points) Discuss the sensitivity of the results to key assumptions about model parameters and processes.
c.(10 points) Explain how uncertainty about potential impacts of global warming might be factored into the DICE model, or one like it, and how this is likely to affect results.
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