Midterm

Question 1

How is the optimal level of pollution defined?

Answer 1

If the marginal cost of pollution abatement is just equal to the marginal benefit from pollution abatement, then we have reached the point where society’s welfare has been maximized with respect to environmental quality.

Question 2

Can the environment be too clean?

Answer 2

If the marginal cost of pollution abatement exceeds the marginal benefit from the reduction, then the benefit of cleaning the environment is not worth the expense.

Question 3

What is consumer surplus?

Answer 3

Consumer Surplus is the difference between Willingness to Pay and what one actually paid

Question 4

If two firms have different marginal abatement costs for emissions what is the efficient level of pollution abatement…

Answer 4

The efficient level of pollution abatement is where firm’s MAC is the same.

Question 5

What are some of the assumptions of the Tiebout model of local public goods

Answer 5

• Full Mobility
• Full knowledge of differences in revenues and spending on local public goods
• large number of communities to choose from
• there are no employment constraints
• there is an optimal community size
• Communities below optimum size try to attract new residents to lower average costs

Question 6

If moving from allocation A to allocation B is a pareto improvement, that means that:

Answer 6

Someone was made better off by moving to allocation B, and no one was made worse off.

Question 7

Determining who has standing in benefit cost analysis means…

Answer 7

deciding whose costs and benefits will be included in the analysis.

Question 8

Optimal Quantity Produced

Answer 8

MSC = MPC + MEC

Question 9

To find optimal pigouvian tax or subsidy…

Answer 9

set the subsidy equal to the difference between MPB and MPC at Q*

Question 10

What are the limitations of the CPI?

Answer 10

• Doesn’t account for CPI
• Doesn’t fully account for new, superior products
• Doesn’t fully account for changes in quality
• May not capture shopping patterns that determine what people actually spend.

Question 11

Two Welfare Theorems

Answer 11

First Theorem of Welfare Economics = The competitive Equilibrium is Efficient

Second Theorem of Welfare Economics = Any efficient allocation can be achieved by the competitive market, given an appropriate initial endowment of goods.

Question 12

Sensitivity Analysis

Answer 12

Essentially, do this in a BCA in order to determine how a change in a presumption will affect the outcome.

Question 13

What would be the appropriate pigouvian tax?

Answer 13

Tax will be the difference between the MPB and MPC at Q*, so I’ll need to find those prices from the demand and supply equations.

Question 14

Revealed Preference Methods

Answer 14

• Travel Cost Methods
• Hedonic Pricing
• Valuing Life: labor market/consumer price studies

Question 15

Travel Cost Method Issue

Answer 15

How to measure opportunity cost of time?

• Ex: people may derive utility from the scenic drive to a national park.

Question 16

Travel Costs Advantages

Answer 16

• Looks at actual Choices People Make
• Relatively easy/inexpensive
• relatively easy to analyze and collect data and explain results

Question 17

Travel Costs - Potential Issues

Answer 17

• If trips have multiple purposes, hard to isolate value of the recreational site
• How to value opportunity cost of time.
• Need variation for regression results to work
• Endogeneity - what if people choose to locate near a site because they value it?
• Does not capture passive value

Question 18

Hedonic Pricing Advantages

Answer 18

• Looks at actual choices people make

- Reliable data are often readily available

Question 19

Hedonic Pricing Potential Issues

Answer 19

• Concern about omitted variables
• Assumes buyers have full information on all attributes
• Assumes people have free choice over attributes in the housing market
• can’t be used for passive valuation

Question 20

State preference - Contingent valuation is especially useful for what?

Answer 20

It was actually designed to capture passive value in addition to anything that does not have a market value

Question 21

A “statistical life”

Answer 21

what is it worth to you to reduce chance of death?

What is it worth to society to reduce chance of death?

Question 22

High Rivalry, Low Excludability: Open Access Resources Examples

Answer 22

Fisheries, Grazing Lands, Parks

Question 23

For rival goods, derive market demand curve by summing…

Answer 23

horizontally

Question 24

For nonrival demand goods, derive market demand by summing…

Answer 24

vertically

Question 25

Implications of Tiebout Model

Answer 25

• Decentralization
• As number of jurisdictions increases, inefficiency decreases
• As number of jurisdictions increases, the more homogeneous they will become
• Capitalization: the value of local services and the cost “cost” of taxes are capitalized into the housing prices.

Question 26

To find a pigouvian tax rate…

Answer 26

Put the optimal quantity into the MEC function

Question 27

How is the optimal quantity found

Answer 27

Set the MSC (Supply) equal to the MB (Demand)