CED 201 Final Essay Questions

Based on our lecture on agriculture and the environment, and the information from Chapter 10, provide one of the environmental issues related to agriculture and explain why this issue exists.

Water pollution from excess fertilizer use The main issue that the current policy in place recreates the *wrong set of incentives* or there is *no policy or market in place to compare the externality* or public good nature of the product such as degraded water quality.

Explain the difference between stated- and revealed-preference methods for valuing environmental goods and services. When is it appropriate to use one versus the other?

*State-preference methods* are economic valuation methods based on responses to hypothetical questions or market-based situations that seek to simulate or recreate what is likely to happen in a real market. They are used in situations where the good is not actually traded/ or for goods without market valuation. Stated-preference valuation techniques are often used in the case of new products, unknown products, or the case of non-use valuation. *Revealed-preference* techniques are economic valuation methods based on market behavior. They are based on their being a complementarity relationship between a market and non-market good.

List the main driver of forest loss in South American, Africa, and Southeast Asia. Explain how each of these is connected to a topic that we covered previously in this course.

-Farming (subsistence and commercial) -Pasture and Range Farming connects are to development and/or trade and population. Increased world incomes, and the desire for eating more meat, which requires increased pasture and open land.

What are some of the biggest challenges of incorporating renewables into electricity production long-term?

-renewables like wind and solar marginal costs over time will fall (cheapest option) -traditional options will not be used as often, but for them to be profitable/ cheap they must run all the time -This only works out for the firms if renewables are always available, which they are not, so non-renewables are needed to meet demand - the Economist says that renewables are more likely to be helpful during the day, during highest demands/ revenues

Explain how a timber company can determine whether to clear cut a forest plot or practice sustainable forestry. What are the key variables or elements of the problem that the company would take into account when deciding to clear-cut or use an optimal rotation strategy?

1) Stock available and growth periods 2) (The discount rate). owner how much return he or she could get by clear-cutting and selling the total forest 3) assuming zero opportunity cost for the forest, i.e., there is no other valuable option for the land. If the discount rate for the owner is greater than the growth rate of the forest, then he or she will clear-cut and sell. Otherwise, he or she will choose optimal rotation.

Water markets: How can water markets increase efficiency and address scarcity, what are some of the conditions necessary for a market to develop, give an example in the U.S. where a water market has been successful.

A water market is an effective tool for managing limited water supplies by giving users the opportunity to freely trade any surplus water to other users. When water carries a monetary value, those who have the rights to water supplies are motivated to conserve water and sell their surplus to other users. The key benefits of a water market include: stimulating water savings, increasing water availability, improving productivity and allocation efficiency, returning water back to nature and improving accountability for water use. *Murray-Darling Basin, Australia* This water trading has provided a new revenue stream for farmers and helped them manage the impacts of irrigation shortages during severe droughts.

According to a recent "stated preference" survey conducted by Resources for the Future (RFF), consumers in Pennsylvania and Texas have an overall positive or negative view of "fracking"? In terms of willingness to pay, the two largest concerns voiced by consumers in these two states are? Apart from the RFF stated-preference survey, what are two related revealed-preference methods that can/have been used to assess the environmental/health effects of "fracking"?

According to the results from the RFF survey, most respondents support shale gas development and want it done in their state, but done safely. The two largest concerns voiced by the respondents, in terms of willingness to pay, were: Groundwater, Wildlife habitat destruction, and Surface water. Two alternative revealed-preference methods that can/have been used are (1) hedonic property value analysis and (2) averting expenditure analysis using household bottled water purchases.

If the fertility rate of a country instantly falls to the replacement fertility level, does this mean that the population will instantly stabilize? Why or why not?

No, even if the population growth falls to the replacement rate there will still likely be two generations of continued population growth. The reason is that the group with the highest fertility rate, and which was the largest at the time of the policy, produces population momentum and causes population size to increase..

Explain why reducing the pollution level (abatement) to zero is unlikely to be economically efficient. Use a graph (with the price of abatement on the vertical axis and abatement on the horizontal axis) showing a marginal benefit curve and a marginal cost curve to support your explanation.

Reducing pollution levels to zero is not efficient because when emission rates drop to zero, production drops to zero as well. Therefore, consumers trade off pollution from production for the value of production outputs where marginal benefits of pollution costs more than production costs. A downward MB curve for abatement shows declining marginal value of pollution and upward MC for abatement.

Using a simple two-period example (today versus tomorrow), explain how intertemporal supply and demand conditions interact to guarantee that Hotelling's rule holds. (For this question assume that the quantity of the resource is fixed with no new discovery taking place.)

The Hotelling's rule states that price is a reflection of market interest rates. If present value is greater than future value, a firm would extract/ invest now, build interests on investments, then supply will drive down price. However, if future values are greater, the firm would hold off investing/ extracting until the future, which still brings down prices. This drives the firms towards a dynamic equilibrium in the market where a resource is fixed and nonrenewable.

Using supply and demand curves, explain how an environmental tax, such as Pigovian tax, can be introduced into a market and lead to an increase in economic efficiency (no deadweight loss), where a traditional tax leads to an inefficient outcome (a deadweight loss).

The Pigovian Tax is economically efficient in that it applies a social cost tax onto production to offset externalities not typically considered. This tax per unit is applied based on the quantity of externality damage per unit. By covering future costs/ damages, the tax covers dead weight loss through total tax revenue.

Explain, using the intuition of the bid-rent functions, how one type of land use can "out-compete" another.

The bid-rent curves can be thought of as willingness to pay (WTP) curves for accessibility. Different land use types have different levels of WTP for being close the CBD and will trade off travel time with land price per acre. In the figure, Urban has the higher WTP, then Suburban, and finally Agriculture.

The double dividend hypothesis and when it may or may not work.

The double-dividend hypothesis' suggests that increased taxes on polluting activities can provide two kinds of benefits. The first is an improvement in the environment, and the second is an improvement in economic efficiency from the use of environmental tax revenues to reduce other taxes. Policies that raise product prices through some restriction on behavior may create scarcity rents. It only works unless those rents are captured by the government, such policies are less efficient at ameliorating an environmental problem than are policies that do not create rents.

Explain why we will likely never "run out" of a nonrenewable resource such as oil. Does this also imply that we will always be able to extract all of the oil we need? Explain.

The economic model tells us that because the supply is fixed by nature and the marginal costs of extraction will eventually reach a point where it is no longer economically feasible to extract the rest of the resource. Thus, the economically feasible quantity of the resource and the actual physical quantity are often quite different where physical quantity is greater than economic quantity.

Understand price elasticity of [water] demand and how this economic measure is used in policymaking - i.e., how is used to set a price that increases efficiency over just setting the quantity of water used.

The elasticity of demand for water is equal to the percent change in quantity demanded for a 1% increase in price Widespread government policies of subsidizing water supply, especially for agriculture, worsen the problem of excessive demand, placing pressure on governments to fund large-scale water supply projects such as dams and water transfer projects. These supply projects have significant economic and environmental costs. In theory, a market price solution could reduce quantity demanded, avoid excessive costs, and gain net social benefits.

Use a graph with a total cost curve and a total revenue curve for a fishery to show the difference between: 1) the economically optimal outcome; 2) the maximum sustainable yield; and 3) the open-access equilibrium outcome.

The open-access equilibrium is shown by the point where total revenues (TR) for the fishery are equal to total costs (TC). The economically optimal outcome is shown at point where total profits for the fishery is marginal costs equal marginal revenue. The point EM is the biological maximum is the point where the fish species is growing the fastest or is replacing itself at the fastest pace.

Use the Coase Theorem to explain why the government probably does not need to get involved in the externality that arises when I play my radio sufficiently loud that my neighbors are adversely affected, but it probability does need to get involved in addressing pollution that causes global warming.

Theorem says that property rights should be assigned for externalities, though not clearly defined. Transaction costs, barrier to keep people apart, are high enough relative to gains from trade in reducing externalities. In this case, the gains outweigh the costs for global warming more than with the loud music.

What defines climate/weather and how it relates to climate change?

Weather is the condition of the atmosphere at a particular place over a short period of time, whereas climate refers to the weather pattern of a place over a long period , long enough to yield meaningful averages. Climate change is a change in global or regional climate patterns, that causes extreme climate conditions, such as global warming (long term increase in earth's temperature).

In class I presented a simple model of non-market valuation and the willingness to pay (WTP) of the US population to not drill for oil in the Arctic National Wildlife Refuge (ANWR). In the model there were two main values to consider, the trigger price and willingness to pay star (WTP*), where the WTP* increased as the discount rate decreased. Explain why this inverse relationship exists.

Willingness to pay star is the household value where it would be a good idea to extract the oil. If the price to preserve is above WTP*, people will not care to preserve. However, the trigger value for an oil company and the price of oil will cause households to pay a value greater or equal to WTP* to compensate the oil company for loss in extraction value. As discount rates go down, future discounted profit drops; therefore, for the company to drill WTP* must be paid at the trigger price.

(a) List the three main factors that led to the U.S. adopting its current ethanol policy. (b) List three of the unintended environmental consequences of the policy

a) Rising oil prices/ dependence on foreign oil, Concerns over climate change, and Low price of corn b) Loss of conservation research land, Increased water quality degradation, and Loss of untouched land

(a) Define willingness to pay (WTP) and willingness to accept (WTA) and (b) explain why it is likely that these may not be equal.

a) WTP: The maximum amount of money a person would be willing to pay in exchange for obtaining a good or service that increases his or her utility. WTA: The minimum amount of money that a person would be willing to accept in exchange for giving up a good or service, which would reduce their utility. b) Endowment effect, which says that people naturally value the things they own or possess more than those that they don't

What are some of the criticisms and limitations of traditional national income accounting measures (GDP and GNP), i.e., what are the main things that are not captured by these measures?

i. Unpaid labor (child rearing) ii. The value of leisure time iii. The impact of environmental degradation iv. Resource depletion v. Loss of ecosystem services