Questions and Answers of Environmental Economics

Free trade could lead to the overexploitation of natural resources upon which a vast number of the people in poor nations depend for their livelihood. Discuss.
The root cause of underdevelopment and environmental degradation is the ‘overdevelopment’ of a handful of rich nations. Discuss.
In a report by the UNDP in its Poverty and Environment Initiative (1999: 2-3), the following remark was made regarding the UN conferences on development and the environment. What do you think can be
The same UNDP report as above, makes the following statement (Ibid.). Is this an economic or an ethical argument for more public investment that protects the environment and benefits the poor?
State the four features for a clearly defined ownership rights.
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why.(a) ‘Everybody’s property is nobody’s property’.(b) Waste emissions should not
What is externality? Provide two examples that are not given in the text? What are the root causes of environmental externality? Be specific. You are encouraged to use demand and supply analysis to
Clearly delineate the differences and similarities between public goods and common property resources. You may find it helpful to use concepts, such as rival, non-rival, joint consumption, and
It has been shown that the consequence of environmental externality is a divergence between social and private costs. Explain the differences between social and private cost and explain how the
In some instances, consideration of ‘transaction costs’ alone could make internalizing an externality (positive or negative) economically indefensible. Can you provide three concrete examples of
Questions for discussion: read the material in Exhibit 3.3 below and answer the three questions presented at the end of the exhibit. EXHIBIT 3.3 WHAT IS THE MOST DESIRABLE LEVEL OF POLLUTION?
Briefly identify the following concepts: pollution-control technology, pollution-control cost, pollution-damage cost, cost-effective, eutrophication, pollution prevention.
Read the following statements. Respond ‘True’, ‘False’ or ‘Uncertain’ and explain why:(a) Improvement in pollution-control technology reduces pollution while at the same time allowing
Fundamentally, the economics of pollution-control attempts to balance the cost of pollution cleanup with the damage cost to the environment at the margin. With this in mind, explain what happens
Examine the following two statements. Are they equivalent? Why or why not?(a) Pollution-damage costs are externalities.(b) Not all aspects of pollution-damage costs can be evaluated in monetary terms.
Evaluate the relative merit of each of the following environmental-management strategies. Identify a real-world case under which one of these strategies is more appropriate than the others.(a)
Quickly review the following concepts: the polluter-pays principle, regulatory capture, emission standards, effluent charge, and the double-dividend feature of pollution tax.
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why:(a) Public intervention is both a necessary and sufficient condition for internalizing
Provide four reasons why economists generally don’t favor a policy that is based on a command-and-control approach to environmental regulation.
To say that an effluent charge is cost-effective does not necessarily mean that it is socially optimal. Discuss.
The core problem of a command-and-control approach to environmental policy is its inherent bias or tendency to standard-setting practice that is uniformly applicable to all situations. For example,
Refer back to Figure 5.3. Let tk now represent, not effluent tax, but subsidies. In other words, the firm will be paid by the regulators t, (i.e., $20) for each unit of waste cleaned up.(a)
It is often argued that effluent charge (not subsidy) may have a regressive effect on income distribution (i.e., lower-income households may end up paying more tax relative to their income). However,
Briefly describe the following concepts: emission credits, the grandfathering principle, the emissions bubble policy, the emissions offsets policy, the emissions banking policy, pollution havens,
As you have read in this chapter, since the mid-1980s the Environmental Protection Agency (EPA) in the United States has seemingly come to increasingly rely on transferable emissions control (TEC) as
Environmental organizations have opposed market-based pollution-control policies out of a fear that permit levels and tax rates, once implemented, would be more difficult to tighten over time than
Which of the environmental policy options discussed in this and previous chapters would you recommend if a hypothetical society were facing the following environmental problems? In each case, briefly
Are the following three statements reconcilable? Give reasons for your answers.(a) Uncertainty arising from environmental regulation is crippling job creation.(b) Environmental regulations enhance
Environmental regulation creates more jobs that it destroys. Do you agree? Discuss.
As discussed in this chapter, by all accounts the US acid-rain program has been hailed a success at reducing emissions of SO, and NO, from power plants. The reason for its success is largely
Briefly explain the following concepts: consumers’ surplus, revealed preference valuation methods, stated preference valuation methods, conjoint rating analysis, statistical life, aversive
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why:(a) To describe an environmental asset as ‘priceless’ does not mean that it has an
On April 20 2010, an oil rig leased by oil giant BP exploded in the Gulf of Mexico, killing 11 workers and releasing approximately 200 million gallons of oil, tens of millions of gallons of natural
With respect to the contingent valuation method, explain why is hypothetical bias a more serious problem than strategic bias?
Are the two comments below equivalent? Do you agree with the ideas conveyed by these comments? Explain.(a) Putting real economic value on components of nature will help protect the environment and
How would you respond to a skeptic who asked the following question: Should we put a dollar value on nature?
Carefully explain the differences and similarities between the following pairs of concepts as environmental valuation methods:(a) Aversive expenditure versus travel-cost.(b) Conjoint analysis versus
In this chapter we discussed five commonly used techniques for measuring the monetary values of avoided environmental damages (benefits): market pricing; replacement cost; hedonic price; household
A colleague said to me,I have my own personal doubts about contingent valuation when respondents are ethically committed to environmental preservation. If they are asked a willingness-to-accept
Economists are difficult to understand. They claim that they can put a monetary value on premature death, but not on human life. They also claim that they can value ecosystem services (such as a
Briefly identify the following concepts: ‘actual’ Pareto improvement, ‘potential’ Pareto improvement, capital budgeting, double counting, net present value, private discount rates, social
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why.(a) Double counting is a potentially serious problem often encountered in assessing both
Carefully explain the differences and/or similarities between the following pairs of concepts:(a) Capital budgeting and cost-benefit analysis.(b) Net present value criterion and potential Pareto
A hypothetical country has a surplus of $200 million in its budget for the fiscal year just ended. Several proposals have been examined for the use of this money, two of which are emerging as leading
The Stern Review on the Economics of Climate Change (to be discussed in the next chapter), a report commissioned by the British government in 2005, argued for zero discounting of future
Imagine that an environmental regulatory body is in the process of attempting to decide on the level of a toxic substance that can be safely released into an estuary that provides shelter and food
If acompany locates a plastic recycling facility in a predominantly poor neighborhood of a city, would this be sufficient to place the action in the realm of environmental justice? Discuss.
Howwould you reconcile the two observations below regarding the precautionary approach as a decision-making framework (Russell 2005):(a) Making the precautionary principle the norm would encourage
Briefly explain the meaning of the following concepts and terms: greenhouse gases (GHGs), the IPCC, the ‘little ice age’, the Keeling graph, telekinetic property of the atmosphere, global
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why.(a) Climate change and GW are two perfectly interchangeable terms.(b) It is more effective
Explain how the combined effects of clouds, aerosols, forest ecosystems and ocean currents contribute to the difficulty of estimating future GW trends.
Do you agree with the distinguished British economist Sir Nicholas Stern’s claim that climate change confronts economists with ‘the biggest case of market failure’? Explain.
Suppose you are someone who really feels that something serious has to be done to slow the GW trend.(a) Would you support the ‘gradualist’ or the ‘precautionary’ approach? Explain.(b) If you
It is very dangerous to put too much faith in agreements reached through international conventions to address a problem like GW. Look how insignificant the accomplishments of the Kyoto Protocol have
To safeguard the interest of future generations, studies done by the proponents of ‘the precautionary approach to GW (such as, Cline and the Stern Report) strongly advocate the use of a discount
1 percent) discount rate carries its own risk. This is because of the possibility that a discount rate close to zero may hinder important technological advances in the near-term. The adverse effects
Carefully review the following key concepts discussed in this chapter: ESS, biodiversity conservation, species richness, critical thresholds for species extinction, debt-for-nature swaps, protected
Provide the ecological argument for why increases in species diversity would lead to increases in ecosystem productivity, and hence an increase in the production of ESS.
Do you think it is reasonable to assume that the production of ESS follows the law of diminishing marginal product? Explain.
In your own words, explain the arguments given in this chapter regarding why the demand for ESS should be separated into two distinct segments.
Provide three economic reasons why, from a global perspective, there appears to be underinvestment in projects that would lead to the reversal of the current trends in biodiversity loss.
Read Exhibit 10.6 carefully and answer the following question: Can a free-market system be trusted to effectively address the global concern in biodiversity loss? Why or why not?Exhibit 10.6 EXHIBIT
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why:(a) Biological diversity contributes to an increase in the stability of the supply of
Provide brief but critical comments on the following major UN biodiversity related treaties and policy guidelines:(a) The 1973 Convention on International Trade in Endangered Species of Wild Fauna
Briefly identify the following concepts: preventive and positive checks to population growth, exponential growth, the Malthusian trap, Ricardian rent, neo-Malthusian, real per capita output,
Read the following statements. In response, state ‘True’, ‘False’ or ‘Uncertain’ and explain why.(a) The connection between population growth and environmental damage is undeniable. More
More than any other factor, as human population increases it causes a rise in the demand for food and other extractive resources. It is the gradual decline in the quality of arable land and the
Ill-conceived technology, not population growth or affluence, has been primarily responsible for today’s global population problems. Critically comment. Support your comments with specific examples.
The isolated and sporadic instances of hunger that we continue to witness in parts of our contemporary world do not support the Malthusian theory as some would like to claim. These events are caused
Garrett Hardin (1993: 94) wrote:Ceven though] John Maynard Keynes had the highest opinion of his contributions to economics, Malthus continues to be bad-mouthed by many of today’s sociologists and
Davidson (2000) suggested that Malthusians’ repeated predictions about the inevitability of impending economic and ecological catastrophe are ultimately damaging to the cause of environmental
Identify what you consider to be the three most important features of the ecological economics perspective about biophysical limits. How are these different from the Malthusian perspective about
It is argued that all transformations require energy, that energy flow is unidirectional and that there is no substitute for energy. It therefore makes sense to use energy as a numeraire—a
Compare and contrast the neo-Malthusian and the ecological economic perspectives of the biophysical limits to growth.
Briefly review the following concepts: persistent pollutants, assimilative capacity of the environment, common property resources, transaction cost, joint consumption, social cost, private cost,
Consider a risk averse firm with utility function U(z)=z1-g/(1-g) Further assume that D=5, y=10, and g=0.5. Calculate the care level chosen by the firm under the strict liability rule for the two
Consider the model from section 11.3. Assume now that the cost of new technology is C'(e, v) with Cl v (e, v)> 0 Cl vv (e, v) > 0 and -Cl ev (e, v) > 0, where v is a technology parameter
For the specification in exercise 16.1, derive expressions for the elasticities of the probability of alternative j with respect to a change in Xij and a change in Xik, for k not equal to j.The
Suppose you have estimated a model that includes only the installation and operating cost variables. The results are:(a) The negative of the coefficient on ocij can be interpreted as the marginal
Van Houtven et al. (2014) use these data as part of an analysis linking stated preference with expert elicitation to value water quality. Their Table 7 presents estimates from several models and
Did the courts resolve the dilemma posed in Example 19. 2 correctly in your opinion? Why or why not?Data from example 19. 2 Susceptible Populations in the Hazardous Workplace Some employees are
What is the difference in practice between an approach relying on performance bonds and one imposing strict liability for cleanup costs on any firm for a toxic substance spill?
Assume the demand and marginal cost conditions given in the second self-test exercise in Chapter 2. In addition, assume that the government imposes a price control at P = $80/3.(a) Find the consumer
Consider the probability functions p(a)= min{1/a,1} and p(a)=1+a(a-2). Calculate the socially optimal levels of care for thesimple model outlined in section 10.1.Data from section 10.1] Consider a
Consider a risk averse firm that is regulated by the strict liability rule. Set up the first-order condition for the firm’s optimal care level. Show that our assumptions guarantee that the
Consider a competitive firm engaging in risky activity, where damage is a function of output level x. The cost of production is C(x), which is increasing and convex in x. The damage function is D(x)
Assume now that production and care cost are not separable but are instead represented by a joint cost function C(x,a). What assumptions should be imposed on C(x,a)? Determine the socially optimal
Consider the model as in exercise 10.4, but assume the polluting firm has monopoly power on the output market. For this we assume the monopolist faces a downward sloping inverse demand function P(x),
Consider the case of limited liability, where the firm becomes bankrupt in case of an accident. Show that the second-order condition for the firm’s first-order condition is guaranteed by our
Assume a polluting firm is risk averse and sufficiently wealthy such that bankruptcy is not an issue (i.e. y−a*−D>>0). (a) Show by examples that under strict liability a polluter may
Assume a polluting firm is risk averse and not sufficiently wealthy to cover the damage in case of an accident (i.e. y−a*−D
Assume that the strict liability rule holds and a potentially polluting firm is risk averse. Define ŷ implicitly by ŷ= asl s (ŷ) + D, where asl s (ŷ) is the solution to the solvent firm’s
Assume the negligence rule holds and the owner of the potentially polluting firm is risk averse. Assume that the regulator sets the due care level equal to the socially optimal level, so that ā=a*.
Assume the negligence rule holds. Show that the second-best optimal due care level anr(y) is given by:(a) anr(y)=a* for y≥y̆(b) anr(y)=ā(y) for y [1-p(as (y))]U (y-a" (y)) = U (y (y))
Draw on example 10.1 to show that for y=30, partial coverage (denoted by c) induces a higher level of welfare than full coverage.Determine the second-best optimal level of partial coverage. Which
Consider an abatement cost function C(e,κ)=(a−be−κ)2/2b, where κ is the amount of private investment to reduce abatement costs.There are J identical firms. The social damage function is
Assume there is a single firm producing the output with a general cost function C(x,e,κ).(a) Set up some reasonable assumptions on C(x,e,κ).(b) Determine the socially optimal allocation, given a
Consider an abatement cost function of the typewhere 0(a) Determine the socially optimal allocation.(b) Determine the socially optimal policy mix, including optimal levels.(c) Now assume the
Consider abatement cost curves of the type C0(e)= (a0−b0e)2/2b0 and CI(e)=(aI−bIe)2/2bI with a0>aI and a0/b0>aI/bI. The social damage function is D(E)=d·E2/2 and the adoption cost for
Now consider the continuum-of-firms model as suggested in section 11.3. The conventional and new technologies are again given by C0(e)=(a0−b0e)2/2b0 and CI(e)=(aI−bIe)2/2bI with a0>aI and

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