Unit 20 - Economics of the Environment

Question 1

Why may natural changes become self-reinforcing

Answer 1

Due to natural positive feedback process

e.g. deforestation:
farming reduces forest area
Deforestation reduces rainfall
Drier conditions increase chance of fires
fires further reduce forest area

Question 2

What are some solutions to the problem of overuse

Answer 2

Taxes on the resource (congestion charge during rush hour)

Tradable licenses (issue licenses that correspond to optimal level)

Make resources excludable and assign property rights - incentives owner to protect it

Question 3

What are some solutions to the problem of overuse

Answer 3

Taxes on the resource (congestion charge during rush hour)

Tradable licenses (issue licenses that correspond to optimal level)

Make resources excludable and assign property rights - incentives owner to protect it

Question 4

What are abatement policies

Answer 4

Policies that can address climate change

Question 5

What is the abatement cost curve

Answer 5

A curve that represents cost per unit of abating green house gas from the most cost-effective to the least

Question 6

What does the optimal choice of abatement level depend on

Answer 6

1) Citizens value for the environment (affects MRS)

2) Costs of abatement (affects MRT)

Question 7

What are the two types of Abatement policies

Answer 7

Price-based policies = taxes and subsidies to affect prices; internalise external effects of individual choices

Quantity-based policies = bans, caps and regulations

Question 8

How does Cap and Trade work

Answer 8

Government sets a cap or limit with enough permits (allocated through auction) to meet the cap. firms can buy and sell these permits among themselves.

This is a combine quantity and price-based policy

Question 9

What are some issues with cap and trade

Answer 9

Policymakers need to set the correct level of abatement (cap) - not easy to determine

Putting a price on e.g. pollution may send the wrong signal to firms, making production profitable when the price falls

Question 10

How can we measure environmental costs/benefits

Answer 10

1. Contingent valuation: Use surveys to assess the value of nonmarket resources
   A stated preference approach - assumes respondent’s statements indicate their true preferences
2. Hedonic pricing: Uses prices of market goods to infer the economic value of unpriced attributes e.g. environmental qualities
   A revealed preference approach – uses behaviour as an indication of preferences