ECON Exam 2
Portney's Benefit-Cost Analysis of 1990 Policy
1990 amendments overregulate society
Survey Approach
Derives estimated abatement expenditures from a sample of polluting sources via surveys; Assumes sources are sufficiently well-informed; Polluters have an incentive to exaggerate costs to officials to increase the probability that the proposed regulation will be rejected
Engineering Approach
Estimates abatement spending based on least-cost available technology; Relies on experts in abatement methods; difficult to use; understates true costs
The technology-based effluent limitations are actually performance-based standards.
True
The ____ method measures benefits based on a technical relationship between an environmental contaminant and its observed damage.
damage function
Air quality
defined through standards that set limits on anthropogenic pollutants
____ costs provide a more accurate measure of resource utilization.
economic
Air Quality Index does not measure concentration of ____ .
lead
Real discount rate is the nominal discount rate ____ the inflation rate
minus
If an abatement standard is set to satisfy allocative efficiency on a national scale, that standard would not be optimal at the regional level unless the national MSB and MSC functions were identical to those at the regional level.
true
If emissions standards are set solely on the basis of benefits, this will lead to over regulation of environmental quality.
true
In a deposit-refund system, the deposit makes the polluter internalize the externality caused by improper waste disposal by absorbing the cost of any damage it might generate in advance.
true
Market-based instruments are a secondary form of control when it comes to environmental problems.
true
The Environmental Kuznets Curve postulates an inverted U shaped relationship between pollution and income.
true
The incremental cost of a policy is the difference between the total social cost after the policy and the total social cost before the policy.
true
The main contributor to acid rain is SO2.
true
The marginal cost of enforcement (MCE) must be added vertically to the MACmkt to derive the marginal social cost (MSC) of abatement function.
true
The principal component of photochemical smog is tropospheric (ground- level) ozone (O3).
true
The production of ozone depleting substances can be modeled as a negative externality.
true
United States first opted to (partially) ban use of CFC's in 1978.
true
Water pollutants can be categorized into two sources: point and non point sources.
true
Zero discharge of effluents is a goal of federal water policy.
true
Title IV CAA
two phase acid rain initiative (reduction plan for NOx emissions and cap/trade allowances for SO2 emissions)
If the Marginal Social Benefit of an uniform abatement standard exceeds the Marginal Social Cost of that standard, this leads to _____.
undercontrols
Photochemical smog is found in
urban areas
Standards to define water quality
use designation (intended purpose of water body) and water quality criteria (pollutant specific)
Btu/Carbon tax
use slightly different tax bases; Both encourage fuel switching and conservation by raising fuel prices; Carbon tax is more specific
Clean Water Act
zero discharge goal, fishable-swimmable goal, no toxics in toxic amounts
The major goal(s) of Clean Water Act are
zero discharge, fishable swimmable, no toxics in toxic amounts
Consider the market for an ozone depleting substance where the market demand and supply equations, respectively are as follows Qd=20-1.5P Qs=5+0.5P where P is the per unit price. If a $2 excise tax is levied on the seller, how much of the excise tax is borne by the consumer.
$0.5
Consider the market for an ozone depleting substance where the market demand and supply equations, respectively are as follows Qd=20-1.5P Qs=5+0.5P where P is the per unit price. If a $2 excise tax is levied on the seller, what is the price paid by the consumer.
$8
____ cost does not vary based on the amount of abatement.
capital
Criteria based pollutants are a recognized category of water pollutants.
false
Pollution charge
fee that varies with amount of pollutants released
New Source Bias
firms have an incentive not to initiate new construction to avoid the more stringent and more costly NSPS
Emission limits for stationary sources based on technology standards are
more stringent in PSD areas versus non attainment areas
Greenhouse gases are identified as
neither criteria nor hazardous pollutants
The major issues associated with global air pollution are:
ozone depletion, climate change
bubble policy
plants can measure emissions of a single pollutant as an average of all emission points
If the MACs for firm 1 and 2 are: MAC1 = 0.4A1 and MAC2 = 0.8A2, respectively, and the combined abatement standard is 15 units, then the cost-effective abatement levels are __ units for firm 1 and __ units for firm 2.
10;5
Suppose the combined abatement standard is set at 20 units and firm J and firm K have MAC functions of MACJ = 0.5A and MACK=0.75A, respectively. Then, firm J should abate __ units and firm K should abate __ units.
12;8
Current US Policy
1990 Clean Air Act Amendments (command-and-control oriented; some market-based approaches); Cross-State Air Pollution rule (reductions on SO2 and NOx emissions transported across state borders)
Suppose a firm faces an emission charge implemented as a marginal tax (MT) of 12 and that its MAC = 0.6A. Calculate the abatement level (A) (use only whole numbers, no decimals) at which the firm would be indifferent between paying a tax and abatement
20
Suppose that for some abatement equipment market, the marginal social benefit, MSB = 500 - 1Q, and marginal private benefit, MPB = 300 - 0.8Q, then the Pigouvian subsidy must equal _____ at the efficient output level. Q refers to the units of abatement equipment.
200-0.2Q
Marginal social benefits (MSB) for two regions of a state and marginal social costs (MSC) for the same state are estimated as follows: MSB1 = 500 - 0.75A MSB2 = 150 - 0.25A MSC = 0.5A where A is the level of abatement, and MSB and MSC are in dollars. The efficient abatement standards for region 1 and 2, respectively, are
400, 200
Suppose an industrial unit is releasing emissions into the air leading to health problems and environmental issues. The marginal costs, marginal benefits of production, respectively, are as follows MSB=60- 0.4Q, MSC=10+0.1Q, MEC=0.05Q Q is the output in units and P is the price per unit. The product charge (Pigouvian tax) needed to achieve a socially efficient outcome is $ __. (Do not put in the $ sign or use decimals).
5
Suppose the accounting cost of an environmental policy is $100 and the implicit costs are $400. Then $___ is an accurate measure of resource utilization associated with this policy.
500
Suppose the total social cost of abatement is given as TSC = 0.4A2 + 12A where A is the level of abatement in units. As a result of an environmental policy, if the level of abatement is increased from 50 to 60 units, the incremental cost of abatement is $___.
560
To estimate the incremental benefits of an environmental program, the travel cost method is adopted with the following pre and post recreational inverse demand functions Pre policy: P = 32 - 0.02V1 Post policy: P= 80 - 0.02V2 where V is the number of visitors and P is the admission fee. If the admission fee is $20 per visitor and the number of pre and post policy visitors, V1 and V2, respectively, are
600, 3000
Suppose the marginal cost and marginal benefit functions associated with some air quality legislation are estimated as follows. MSB=70-0.1A MSC=10+0.7A where A is the abatement level in units. Efficiency requires that the abatement standard be set at __ units.
75 (set equal to each other)
To estimate the incremental benefits of an environmental program, the travel cost method is adopted with the following inverse pre and post- recreational demand functions Pre policy: P = 32 - 0.02V1 Post policy: P= 80 - 0.02V2 where V is the number of visitors and P is the admission fee. If the admission fee is $20 per visitor, and the number of pre- and post- policy visitors are V1 and V2, respectively, the change in consumer surplus as a result of the program is $___
86,400
Emission/effluent charge
A fee imposed directly on the discharge of pollution Assigns a price to pollution Typically implemented through a tax
Pollution Permit Trading Systems
A pollution permit trading system establishes a market for rights to pollute by issuing tradable pollution credits or allowances; firms will choose to either abate the extra emissions or buy permits
Clean Fuel vehicles
A vehicle certified to meet stringent emission standards; in ozone/CO attainment areas, a proportion of new fleet vehicles had to be clean fuel
Suppose the abatement standard for an old(O) source is 4 units and the standard for new (N) sources is 10 units. Further the marginal abatement costs are, MAC0 = 1.8AO and MACN = 1.2AN. If the same combined abatement level of 14 units are to be met in a cost-effective manner, the standards for each should be
AO = 5.6; AN = 8.4
Explicit Costs
Administrative, monitoring, and enforcement expenses incurred by public sector plus compliance costs incurred by all sectors
Kyoto Protocol
Agreement requiring 38 industrialized countries to cut GHG emissions to 5.2% below 1990 levels by 2012; US doesn't ratify
____ method uses changes in spending on goods that are substitutes for environmental quality to measure willingness to pay.
Averting Expenditure
Allowance Market
CFCs: Tradable allowances were issued to largest producers and consumers (gradually reduced to 0) HCFCs: EPA is establishing an analogous program
President Bush
Cabinet level review of US climate change policy and formed climate change working group; Led the goal to reduce GHG intensity by 18% by 2012
Operating (variable) costs
Costs of operating and maintaining abatement processes
Primary Environmental Benefits
Damage-reducing effects that are a direct consequence of implementing environmental policy; Reduction in asthma cases or other health conditions
Title IV of 1990 CAA
EPA published a list of ozone depleters (each assigned a potential value and a phaseout schedule); national mandatory recycling program to allow use of recycled chemicals; find safe substitutes; excise tax and marketable allowance system
AEM
Estimates benefits as the reduction in spending on goods that are substitutes for a cleaner environment; Air filters, water filters, etc
Physical Linkage Approach
Estimates benefits based upon a technical relationship between environmental resource and user of resource; Damage function method
Behavioral linkage approach
Estimates benefits using observations of behavior in actual markets or survey responses about hypothetical markets; direct and indirect methods
Reagan
Explicitly called for maximizing net benefits (allocative efficiency) and choosing the least-cost alternative (cost-effectiveness); applicable to any major rule
President Clinton
Explicitly refers to adopting/proposing regulations for which benefits justify costs (allocative efficiency) and designing regulations in most cost-effective manner; applicable to any significant regulatory actions
product charge
Fee added to price of pollution-generating product, which generates negative externalities (excise tax; gas, diesel, tobacco, alc); difficult to identify the value of MEC at Qe; allows only for an output reduction to reduce pollution
Clean Air Act (1963)
First national air pollution control; More power for US presidents to align US policies with international policies
Pollution Reduction subsidy
Government pays the polluter a subsidy for every unit of pollution abated below some pre-established level; might be less disruptive than an equipment subsidy; can elevate pollution levels since it lowers unit costs and raises profit
Piguovian tax
If the tax equals the marginal external cost (MEC) at QE, it is called a pigouvian tax
Abatement equipment subsidies
Incentive to get polluters to use equipment that reduces pollution payment aimed at lowering the cost of abatement (internalize the positive externality); difficult to measure and may bias polluters' decision about how best to abate
Secondary environmental benefits
Indirect gains to society that may arise from a stimulative effect of primary benefits or from a demand-induced effect to implement policy; Improvement in labor productivity due to better health; Harder to measure
Travel Cost Method
Indirect method under behavioral linkage approach; Estimates benefits as an increase in consumer surplus (CS) in the market for a complement to environmental quality (i.e., recreational use), as policy improves that quality; only estimates user value and only addresses recreational use
One of the conditions needed to economically justify relatively higher standards of air quality in PSD areas compared with non attainment areas is
MSC of PSD areas is below MSC of non attainment areas
Climate Change
Major alteration in a climate measure such as temperature, wind, precipitation that is prolonged (lasting decades or longer)
Deposit refund system
Market instrument that imposes an up-front charge to pay for potential damages and refunds it for returning a product for proper disposal or recycling (returning bottles)
Present value determination vs. inflation correction
PV determination: accounts of opportunity cost of money Inflation Correction: accounts for changes in the general price level
Which of the following decision criteria is used in ranking feasible environmental policy proposals.
PV of NB
President Obama
Pledged US to a reduction in GHG emissions of 17% from 2005 levels by 2020; None of the pledges became law; New rulings on mobile sources and stationary sources were either finalized or proposed
Consider the market for an ozone depleting substance where the market demand and supply equations, respectively are as follows Qd=20-1.5P Qs=5+0.5P where P is the per unit price. If a $2 excise tax is levied on the seller, then the new supply curve is
Qs=0.5P+4
Damage Function Method
Specifies a relationship between a contaminant (C) and some observed total damage (TD); Estimates benefits as TD declines from the policy-induced change in C; only estimates on incremental benefit at a time
Capital (fixed costs)
Spending on plant, equipment, construction, and process changes for pollution abatement
Global warming
Sunlight hits the earth's surface, radiates back into the atmosphere, where its absorption by GHGs heats the atmosphere and warms the earth's surface; natural process but if natural levels are disrupted, it becomes problematic; CO2
Drawbacks of gasoline tax
Targets only relatively minor CO2 emitters; Imposes a disproportionate burden on some
Because the effluent limitations are set uniformly, achieving a cost-effective solution is unlikely.
True
Effluent limitation standards are based on technological feasibility rather than what is necessary to achieve water quality.
True
In environmental economics, where law prevents the use of efficiency criterion, a second best solution is to use the cost-effectiveness to select policy instruments.
True
HPM
Uses estimated hedonic, or implicit, price of an environmental attribute to value a policy-driven improvement; regression analysis (environmental quality in the area); difficult to employ
The New Source Bias will lead to ____.
a bias against new construction
Criteria based pollutants typically impact ____ section of society compared with ___ air pollutants.
a larger, hazardous
Air Quality Index
a measure of ozone, sulfur dioxide, carbon monoxide, and fine particles close to the ground; relatively large metropolitan areas
emissions banking
a source can save emission reduction credits if it cuts emissions more than required by law and can deposit these through a banking program for future use
The zero discharge goal
all of the above: calls for the total elimination of water-polluting releases is overly ambitious is inherently benefit-based
In the United States, once environmental projects are deemed feasible, the selection criteria used are
allocative efficiency or cost-effectiveness
Under the New Source Performance Standards for stationary sources, standards are _______.
allowed to vary across industry categories
netting
allows trade to take place within a plant for the same pollutant
In the US market for chlorofluorocarbons (CFCs), the phaseout of CFCs lead to ___ in the price of CFCs.
an increase
US auto emissions standards for the most part are ____.
applicable across the board on every model
The bubble policy allows a plant to measure emissions _____ within a plant.
as an average from all of its release points
Direct user value
benefit derived from directly consuming services provided by an environmental good (swimming in a lake)
Indirect User Value
benefit derived from indirect consumption of an environmental good (aesthetic value)
User value
benefit derived from physical use or access to an environmental good (direct and indirect)
Existence value
benefit received from the continuance of an environmental good (vicarious consumption and stewardship)
Surface water
bodies of water open to earth's atmosphere as well as springs, wells, or other collectors directly influenced by surface water
A gasoline tax is not considered a better alternative to a carbon tax because it is
broad based
The most likely explanation agreed on by scientists as the cause of ozone depletion is
chlorofluorocarbons
growth and the environment
economic growth must decline between 3.5 and 4% per year to avoid furthur pollution and natural resource depletion
types of pollution charges
effluent/emission fees (taxed on how much you emit), product charge (tax the product), user charge, admin charge
techology-based effluent limitations
end-of-pipe limits that control releases from point sources based mainly on technological capability (applied uniformly) standards are industry-specific and vary by facility age and type of contaminant
Environmental justice is a ___ criteria used in US environmental policy.
equity
offset plans
established for use in nonattainment areas by new or modified sources; allows trade between new and existing sources
If based on the present value of net benefits, a project is considered feasible then it must be the case that the ratio of present value of benefits to costs for the same project ____ and the project is considered ____.
exceed one, feasible
If an individual derives utility from the preservation of an endangered species. This is an example of ___ of the species.
existence value
Explicit vs. Implicit costs
explicit: monetary implicit: costs of non-monetary effects (time cost of searching for substitutes)
A non point source of water pollution can be clearly identified.
false
According to the cost-effective abatement criterion, all polluting sources would abate pollution up to the point where their individual total abatement cost (TAC) levels were equal.
false
An environmental standard that specifies a pollution limit along with the equipment to be used to achieve that limit is called a performance-based standard
false
Groundwater refers to ____ .
fresh water
ground water
fresh water beneath the earth's surface, generally in aquifers
Which of the following pollution charges have been commonly proposed to tackle carbon dioxide emissions.
gasoline tax, carbon tax, and Btu tax
For a environmental project to be feasible, the ratio of present value of benefits to present value of costs must _____.
greater than one
The market price of a house depends on several attributes including the environmental quality around the house. Thus, environmental quality has a ____.
implicit price
Suppose the marginal cost and marginal benefit functions associated with some air quality legislation are estimated as follows. MSB=70-0.1A MSC=10+0.7A where A is the abatement level in units. If the abatement standard is set at 80 units then this standard will be ____.
inefficient (plug in for A)
Hydrologic cycle refers to
interdependence of all water resources
Environmental Kuznets Curve
inverted U-shape relationship between income levels and environmental damage; early stages of industrialization are linked to relatively high pollution levels when growth is a priority and environmental controls are lenient
The efficiency criteria outlined by Ronald Reagan applied to any ___rule.
major
An environmental policy that aims at maximizing total social benefit implies that ____.
marginal social benefit equals zero
National Ambient Air Quality Standards (NAAQS)
maximum allowable concentrations of criteria air pollutants; primary NAAQS (set to protect public health from air pollution); secondary NAAQS (set to protect public welfare from nonhealth effects); no cost considerations and no uniformity
Hazardous Air Pollutants
may cause or contribute to irreversible illness or increased mortality; higher risk but smaller section of society; 189 have been identified
To get a sense of urban air quality, Environmental Protection Agency monitors the air in
metropolitan statistical areas with populations over 350,000
Climate change ____ due to human activities.
might be
Analysis of NAAQS
no cost considerations (solely benefit based, economic feasibility is not considered, primary standards include "margin of safety") uniformity (nationally based, not regional based; distinctions are allowed for PSD areas)
US Air Quality Legislation
no national air quality law under Air Pollution Control Act of 1955; no truly comprehensive legislation until Clean Air Act of 1963
The implication of Portney's analysis of Clean Air Act Amendments is that the private sector is _____.
overregulated
Water resources are vulnerable to contamination from
point and nonpoint sources
Most commonly used market-based instrument (internationally)
pollution charge
The most commonly used market based instrument to control pollution, internationally, is a
pollution charge
In order to adjust benefit and cost estimates for the changing value of the dollar over time, _____ modification(s) is(are) necessary
present value determination and inflation correction
In a cap and trade system with two polluters with different costs of marginal abatement (MAC),the high cost polluter will buy (identify the strict condition) a permit from the low cost polluter as long as
price charged by the low cost polluter is lower than the MAC of high cost polluter.
fuel quality controls
prohibits leaded fuel after 1995; requires reformulated gas in certain ozone nonattainment areas; requires oxygenated fuel in certain CO nonattainment areas
National Emission Standards for hazardous air pollutants
protect public health and the environment and are applicable to every major source of any identified hazardous air pollutant
Under the 1970 Clean Air Act Amendments, the rule used to arrive at auto emissions controls were ____.
purely benefit based
market approach
refers to incentive-based policy that encourages conservative practices or pollution reduction strategies; pollution charge, subsidies, deposit/fund systems, pollution permit trading systems
Water Quality act of 1987
required states to set up programs for nonpoint sources
President Obama Executive Order
requires that a regulation can be proposed or adopted only if the benefits justify the costs and that, if choosing among alternative regulatory initiatives, the one that maximizes net benefits should be chosen
Federal Water Pollution Control Act of 1972
responsibility for water quality shifted to the federal level, specific goals for water quality were established, new technology-based effluent limitations were set
UNFCCC (1992)
rio summit; Called for national strategies to limit GHG emissions with the objective of reducing emissions to 1990 levels by 2000; no uniform emission targets
Montreal Protocol
signed in 87 by 24 countries; 50% reduction of CFC consumption and production; amendments (HCFCs phased out by 2020 and other depleters phased out by 2005); tradeable allowances
Criteria Pollutants
substances known to be hazardous to health and welfare; PM, SO2, CO, NO2, O3, Pb
The more significant pollutant contributing to acid rain is _____.
sulfur dioxide
US domestic water policy addresses _____ category(ies) of water resources.
surface water and groundwater
Emissions from stationary sources are mainly regulated by _____.
technology based standards
Ozone Depletion
thinning of stratospheric ozone layer; primary depleters are CFCs and halons
Greenhouse Gas pollutants
those collectively responsible for the absorption process that naturally warms the earth; become problematic if natural GHG levels are disrupted; CO2 is a primary GHG (methane, NO, HFC, PFC, sulfur hexaflouride)
water pollutants under the law
toxic pollutants (upon exposure will cause death, disease, etc), conventional pollutants (identified and well-understood), non-conventional pollutants (default category)
A controversy in the climate change debate is the predicted response to increased production of greenhouse gases.
true
A pollution charge can be implemented as an emission charge.
true
For a Pigouvian tax to be effective, the unit tax must be equal to marginal external cost at the socially efficient output level.
true
