Environmental and Resource Economics

Succinctness is appreciated.  Explain your answers carefully.  If the question seems ambiguous, explicitly state any assumptions you need to make to answer the question.

Part I.  (Total Points: 12) Answer three of the four questions below.  Each question is worth 4 points.

1. How would you apply the concept of “Ramsey discounting” to a cost-benefit analysis of policies designed to reduce the intergenerational impacts of climate change?

2. A researcher is using the following log-linear equation as part of a hedonic study that is attempting to estimate the value of cleaning up a hazardous waste site:

Ln(p) = α + βln(x) + z(y) + ε

where:

p is the price of each house in the area surrounding the hazardous waste site;

x is distance (in feet) of a house from the hazardous waste site;

y is a vector of housing k variable characteristics (e.g., number of bathrooms, size of house, etc.) for each house;

β is the estimated coefficient between the price of a house and its distance from a hazardous waste site; and

z is a vector of k estimated coefficients between housing variable characteristics and the price of a house in the area surrounding the hazardous waste site.

Show that the estimated coefficient, β, in the equation (which shows the relationship between the price of a house and its distance from a hazardous waste site) is an elasticity.

3. When estimating the hedonic house price equation in the question above (Question 2 of Part 1), suppose that the researcher suspects heteroskedasticity. How would she use the Breusch-Pagan test to assess whether the equation has heteroskedasticity or not?

4. “Willingness to pay” and “willingness to accept” estimates of the value of environmental and natural resources often can vary by a factor of up to 10. Briefly, why do you think that the two approaches, “willingness to pay” and “willingness to accept”, can yield such different estimates? In which environmental policy situations would you use a “willingness to pay” measure of the value of an environmental/natural resource and it which situations would it make sense to use a “willingness to accept” measure?

Part II.  (Total Points: 12) Answer all three of the following questions below. If you decide to use diagrams, they should be neatly drawn.  On all diagrams, please label your axes and curves. Each question is worth 4 points.

Background: Assume that the earth’s climate is a global, non-excludable public good in that each individual citizen in each country in the world cannot be excluded from the benefits of greenhouse gas mitigation efforts by other countries.  For the sake of this example, assume that there two countries in the world, Country One and Country Two.  Each Country has its own individual willingness to pay (i.e., marginal benefits) for avoiding climate change damages from greenhouse gas emissions in its own Country. These estimates are:

Country One:  P = 550 – Q₁

Country Two:  P = 650 – Q₂

where

• P is the willingness to pay (i.e., marginal benefits) in $/ton from a reduction in greenhouse gas emissions for each country, and

• Q₁ and Q₂ are the reductions (i.e., abatement) of greenhouse gas emissions (in tons) by Country One and Country Two, respectively.

Assume for simplicity’s sake that the marginal cost of reducing greenhouse gas emissions (in $/ton) is constant across the world at $200.

(1) Derive the socially optimal global level of avoided climate change that should be undertaken.

(2) What is Country One’s “threat point” (i.e., the level of CO₂ abatement that the Country would undertake considering only its own benefits and costs)?  What is Country Two’s “threat point”? Assume that both Country One/Country Two can accurately estimate the other Country’s benefits and costs of CO₂ abatement.  Assume that each individual Country seeks to maximize its own narrow self-interest (i.e., pursues “non-cooperative” behavior), taking into account the other Country’s expected behavior. How much CO₂ would Country One and Country Two abate? What are each Country’s response functions, and how do the response functions determine how much each Country abates of CO₂ emissions?

(3) Assume that Country Two wants to show “leadership” on climate change. With leadership, Country Two’s willingness to pay to avoid climate damage now becomes P = 700 – Q, instead of P = 650 – Q.  Given Country Two’s show of leadership, how much would Country Two abate? What would be Country One’s response in terms of its level of emissions abatement?  With Country Two’s show of leadership, what would be the combined level of emissions abatement for the two countries?  How would the overall level of abatement of the countries now compare to the social optimal global level of abatement?

Part III.  (Total Points: 12) Answer three of the four questions below.  Each question is worth 4 points.

Background: You are given the following general equation about the relationship between the population size and the growth rate of the fishery off the coast of Zantia:

g  = rS(1 – S/k)

where

g =  the growth rate of the fish population

r  =  the intrinsic growth rate of the fish species in the fishery

S =  the size of the population of fish

k =  the carry capacity of the fish habitat in the waters off the coast                                    of Zantia

The amount of fish that can be caught in Zantia is given by the following equation:

H = q E S

where

H = the amount of fish harvested

q  = a “catchability” coefficient that tells how easy fish can be                                            caught (for Zantia, assume that q has been determined to equal                                            one (q = 1))

E  =  amount of fishing effort (each unit of fishing effort is equal                                     to one vessel and the crew to man the vessel)

Assume for simplicity that fish in Zantia can be sold for a price of $1each and that the total cost of fishing effort is equal to:

TC = aE

where

TC = the total cost of fishing effort

a   =  the marginal cost of fishing effort

• Derive the level of effort that results in the maximum sustained yield for Zantia’s fishery. How does the level of effort that results in the maximum sustained yield change with changes in r (e.g., the intrinsic growth rate of the fish species in the fishery), S (e.g., the size of the population of fish), and k (e.g., the carry capacity of the fish habitat)?

• Derive the level of fishing effort that maximizes profits for Zantia’s fishery. How does the profit maximizing level of effort change with changes in r (e.g., the intrinsic growth rate of the fish species in the fishery), S (e.g., the size of the population of fish), and k (e.g., the carry capacity of the fish habitat)?

• In his article “Free Riders en Route to Disaster,” Julian Edney describes a common property game involving nuts in a bowl. He describes some of the group solutions to the game as quite creative. Quoting him, “One of the groups, for example, decided that to slow down the “harvest”, they would have to skewer each nut on the end of a pencil, balance it on their noses, and walk over to deposit it in a chalkboard tray before returning for another single nut.” Edney seems to feel that this “solution” solved the problem. Discuss, using an economic perspective, whether it did. What would be your proposed solution to slow the “harvest”?

• Suppose for this question that the waters off Zantia are legally defined as international waters. Thus, the fishery is known as an “open access resource”.  What is an “open access resource”?  Why do open access resources often exhibit what is known as the problem of the “tragedy of the commons”?  What properties of efficient property rights are violated by an “open access resource”?

Have a Great Rest of the Summer!!!