I'm currently teaching a graduate level Environmental and Resource Economics course--shocking eh? I thought you might like to see what the midterm looks like. The course has both Master's and PhD students in Ag Econ, Econ and Public Policy. If you want, take a shot at answering a question or two--although I fully expect any comments to be void of answers and instead critical of the questions.
Question 1
In his article “Prices vs. Quantities,” Weitzman argues that it is not always clear that Pigouvian taxes are preferred to quota restrictions on output. Explain under what conditions Pigouvian taxes and quotas are equivalent, and under what conditions taxes and quotas might have relative advantages. In your answer be sure to consider both theoretical and practical concerns of implementing taxes and quotas.
Question 2
Explain why it is not necessary to tax or subsidize victims of pollution to induce them to undertake the optimal level of preventative activity.
Question 3
Consider a simple example of a single polluter and a single victim. Assume that there are no impediments to bargaining and that transaction costs are zero. Suppose a tax is placed on the polluter equal to the marginal social damage. If negotiations between the polluter and victim occur after the tax is imposed, will the outcome be Pareto Optimal? Explain either mathematically or graphically and in words.
Question 4
The U.S. Environmental Protection Agency describes their sulfur dioxide trading program as follows “The Acid Rain Program represents a dramatic departure from traditional command and control regulatory methods which establish specific, inflexible emissions limitations with which all affected sources must comply. Instead, the Acid Rain Program introduces an allowance trading system that harnesses the incentives of the free market to reduce pollution.” Explain how a system of tradeable permits can “harness the incentives of the free market.” Under what conditions will a tradeable permit system achieve economic efficiency? In your answer be sure to describe the conditions for economic efficiency as they pertain to pollution.
Question 5
Either graphically or mathematically, explain the relationship between compensating variation, equivalent variation, willingness to pay and willingness to accept for a perceived improvement in environmental quality. Under what conditions can we capture the effects of this quality change in the market for a related consumable commodity?
Question 6
Engineers often argue that the social value of an environmental improvement can be measures by the increased economic activity created by the project. For example the argument might go something like this: The social value of a beach renourishment project to improve the quality of Lake Erie beaches can be calculated as the increase in hotel, food, etc. expenditures by visitors to Lake Erie beaches. Is this a measure of the social value of the project?
Question 7
The NOAA Blue Ribbon Panel suggests that the referendum format is the preferred format for the elicitation of willingness to pay using the contingent valuation method. Explain the NOAA Panel’s recommendation.
