ECON 311 Midterm Spring 2005
ECON 311: Economics of the EnvironmentName:______
Spring 2005 Bellas
Midterm
You have three hours and twenty minutes to complete this exam. Answer all questions, explain your answers, label axes and curves on graphs and do your own work. Fifty points total, points per part indicated in parentheses.
0. We’ll start out with an easy one. The College of Management just installed a water cooler very near my office. While previously I had to walk across the floor, down the stairs and into another room to get water, now I just need to step out of my office.
A. How has this changed the quantity of water I drink while at the office? (1)
B. How would total water consumption change if each faculty member had a water cooler in his or her office, assuming that the total number of people on the faculty did not change? (1)
1. The key to resolving environmental problems is to make people pay for all of the costs of their actions. For purposes of this question, consider the action of driving an automobile in the Minneapolis-St. Paul metropolitan area during the day. Briefly list the costs associated with this action that a driver pays for and those that she doesn’t pay for. (2)
2. My wife and I lived in Bulgaria for a year. Many aspects of life were very different there. Among the differences was how people paid for their utilities such as heat and hot water.
A. In some apartment buildings (which is where everyone lived) hot water use was measured only for the building as a whole and the bill was divided equally among the building’s occupants. In other buildings, hot water use was measured for each apartment separately and the residents of an apartment had to pay for what they used. A student did some research looking at hot water use under each of these two systems. According to economic theory, what should he have found? (2)
B. Another utility that was handled differently in Bulgaria was heat. For the most part, heat was provided through steam radiators that were centrally supplied with steam and which individual apartment or office dwellers were unable to control. Offer two reasons why replacing steam radiators with small, portable electric heaters would have reduced the amount of energy used for heating. (2)
3. Consider a standard supply and demand diagram for some good such as sandwiches.
A. Diagram a negative externality that results from the production of sandwiches. (2)
B. Diagram a negative externality that results from the consumption of sandwiches. (2)
C. Offer a real world example of a good that has an externality associated with its production. (2)
D. Offer a real world example of a good that has an externality associated with its consumption. (2)
4. To address the problem of a large quantity of automobile traffic and resulting congestion, a city decides to build extra highway lanes. To pay for these extra lanes, the city plans to implement a “pay as you drive” plan that would charge people a highway use fee based on the amount of driving they do. Once the extra lanes are paid for, the highway use fee will be ended. Explain what is silly about this plan. (2)
5. Consider the following diagram showing the relationship between the level of cleanliness of a lake and the total value of that lake.
A. Draw in the associated marginal value curve. Please be careful and clear in your diagram. (2)
B. Now consider the diagram from the point of view of the level of effluent into a lake. For the indicated marginal damage (MD) and marginal abatement cost (MAC) curves, please indicate which point or points (from A, B, C and D) are or might be optimal and how you would choose between or among them. (2)
C. The diagram from part B, on which the horizontal axis is labeled “Effluent”, is reproduced below. Carefully circle the correct portion of the correct curve that represents downward sloping demand for or marginal value of cleanliness. (2)
6. An aquifer, an underground body of water, will yield water to anyone who drills a well down to it at zero marginal cost. There are 100 people with historical access to an aquifer, each of whom has the following demand for water (specified by price and quantity demanded in a year):
PQd
$7 2
$6 4
$5 6
$4 8
$310
$212
$016
The aquifer currently holds 16,000 units of water and recharges at a rate of 800 units per year.
A. If extraction is costless, how long will the water last if access is restricted to the original 100 people? (2)
B. How long will the water last if the number of people with access to the water is 200? (2)
C. What price for extraction of a unit of water would lead to sustainable use of the aquifer if there are 100 people with access to it and if there are 200 people with access to it? (2)
D. Imagine that sustainability was to be achieved by restricting the number of people with access to the water rather than by charging people for what they use. What is the largest number of people that would use the water in a sustainable way if there were no way to charge people for their use? (2)
7. A well organized population of 1000 mice is addressing the problem of a cat that resides in their building and kills mice. Each mouse has an annual probability of a cat-related death of 0.03. This probability would be reduced to 0.01 if the mice were able to put a bell on the cat, which would warn them of her presence. The only problem is that the mouse that puts the bell on the cat will die doing so.
A. Is it efficient to bell the cat? (2)
B. Explain how issues of standing may result in this program not being done. (2)
C. What does this have to do with environmental economics? (2)
8. In discussing valuation of benefits of environmental programs, there were four methods that were explicitly mentioned as either indirectly or directly measuring willingness to pay for benefits. They were the travel cost method (TCM), hedonic property valuation (HPV), the value of a statistical life (VSL) and contingent valuation (CV). For each of the programs listed below, indicate which of the four techniques would be appropriate for evaluating benefits. There may be multiple techniques that are appropriate. (4)
TCM / HPV / VSL / CVAn air quality program that would improve visibility in an area but not have any health effects
Creation of several neighborhood parks within a city
A water quality program that would eliminate odorless and tasteless carcinogens from drinking water
Construction of walls and planting of trees to reduce noise from busy roadways and highways
9. A public good has a marginal cost of provision of $80,000 per unit. Each person in a city has the following demand for this public good:
QMV
1$95
2$85
3$75
4$65
5$55
6$45
7$35
A. In a city of 1,000 people, what is the efficient number of units of this public good? (2)
B. As the size of the city increases, what happens to the efficient level of provision of a public good, other things held constant? (2)
10. Imagine that a lake is being polluted by two firms, each of which is emitting eight tons of effluent annually. The two firms have the following marginal abatement cost schedules:
TonsMACAMACBMB
1$ 1$ 3$34
2$ 4$ 5$32
3$ 7$ 7$30
4$10$ 9$28
5$13$11$26
6$16$13$24
7$19$15$22
8$22$17$20
9$18
10$16
11$14
12$12
13$10
The marginal benefits (MB) of reducing effluent are given in the above schedule.
A. Calculate the efficient or socially optimal level of abatement assuming that abatement is done in the least costly way. (2)
B. If eight permits, each of which allowed one ton of effluent to be emitted, were to be auctioned off, how many would each firm purchase and what would be the equilibrium price? (2)
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