Multiple Choice or True/False:
problem 1: “Revealed preference methods for valuing environmental goods and services (e.g. the travel cost model, hedonic price method, etc.) can reveal non-use values.”
problem 2: “The elasticity of demand for gasoline is likely to be higher for price changes lasting many weeks/months than for a change persisting for only a few days.”
problem 3: The marginal benefit (demand) curve for pollution for an industry is P = 100 - 4*Q, where Q is emissions in tons. The current emissions tax (price) for pollution is $40/ton. Regulators are curious if a 10% decrease in the pollution tax will lead to a disproportionate percentage increase in emissions. You find out the elasticity of pollution demand and conclude (choose one):
a) Demand is elastic. A reduction in the tax will lead to a disproportionately large increase in emissions.
b) Demand is elastic. A reduction in the tax will lead to a smaller than proportional increase in emissions.
c) Demand is inelastic. A reduction in the tax will lead to a disproportionately large increase in emissions.
d) Demand is inelastic. A reduction in the tax will lead to a smaller than proportional increase in emissions.
problem 4: Moving from an economically inefficient to efficient allocation of resources will necessarily increase benefits by more than costs.
problem 5: There are two demand curves for a private (i.e. normal consumption) good: P = 30 - q1 & P = 30 - 2q2.
Let Q = q1 + q2 be the total quantity demanded on the market. The equation for the total (market) demand is
a) P = 60-3*Q
b) P = 30-1.5*Q
c) P = 30-2/3*Q
d) P = 60-1/3*Q
problem 6: “Improvements in environmental quality of a recreational site will, all other things being equal, increase consumer surplus of individuals that visit the site.”
problem 7: When considering benefits and costs that occur at different points in time, there is no need to use discounting if the project occurs over a time period without inflation.
problem 8: The marginal benefit of a refrigerant in a production process (the producer’s willingness to pay for its use) is 100-5Q. The marginal damage from the use of the refrigerant on the environment is 150 + 5Q. The efficient amount of refrigerant is:
d) None of the above
problem 9: Clorox lowers the price of its GreenWorks TM bathroom cleaner. All other things remaining the same, choose how you think this will impact the market price of Pine-Sol. (Circle one).
a) It will raise the price of Pine-Sol because they are substitute products.
b) It will lower the price of Pine-Sol because they are substitute products.
c) It will raise the price of Pine-Sol because they are complement products.
d) It will lower the price of Pine-Sol because they are complement products.
problem 10: An investment in flood control infrastructure today will generate $1,000,000 in benefits 10 years from today. Using a 3% discount rate what is the present value of these benefits today (to the nearest dollar)?
problem 11: The total demand (marginal benefit) curve for visiting the Great Barrier Reef is as follows: Price = 5000 + 100*Fish Biomass (tons per square mile) -10*Number of Trips.
a) Does the quantity of fish biomass increase or decrease the willingness to pay for an additional trip?
b) Suppose the density of fish is 2 tons per square mile. Draw the demand curve below, being sure to label the axes and the slope and intercept appropriately.
c) Suppose the marine preserve charges an entrance fee of $100. What is the total net benefit to consumers who visit the park (the “consumer surplus”)? In answering this problem, continue to assume that fish biomass remains at the level in part b. Also, assume that the only cost to visitors is the entry fee (clearly not the case generally).
d) Now assume the park implements a program that drastically limits fishing activities within the preserve and engages in a coral restoration program. The result is a 50% increase in fish biomass from the levels described in part b. Assuming the entrance fee from c) remains the same, what is the new consumer surplus? What is the economic benefit (net of costs) to park visitors from the cleanup program? What is the impact on revenues from park visitation?
problem 12: National Marine Fisheries Service is considering closing a large area of federal waters to fishing in Alaska due to negative interactions of fishing with endangered Steller sea lions (due to capturing of seals in fishing gear and catch of the prey species of the sea lions by fishermen). In doing this, the closures are expected to displace 30 vessels from fishing in the Aleutian Islands, each of which made profits of $100,000 on an annual basis from fishing in these waters. Best estimates are that all 30 of these vessels will find employment in alternative fisheries, but these fisheries will be less profitable yielding profits of only $50,000 per vessel each year.
a) find out the annual cost to the entire industry from the closures.
b) Assuming a 10 year planning horizon (t=1,…,10), find out the present value of these costs using a discount rate of r=.03.
c) At the end of a 10 year period, it is estimated that the closures will result in a growth in the population of Steller sea lions of between 100 and 1000 individuals. Combining this information with your findings in part b, come up with a lower and upper bound on what the mean willingness to pay by society (in period 0 dollars) would need to be per sea lion to overcome these costs.
d) Suppose a stated preference study of non-use values reveals that the average American is willing to pay a sufficient amount such that when added up over the population, the willingness to pay per sea lion saved exceeds the upper bound you derived in part c. Is it necessarily the case that the fishery closure is justified on the grounds of economic efficiency?
problem 13: The demand curve for gasoline is P = 200 - 10Q.
a) Find the elasticity of demand for a quantity of 8. Does this number imply that quantity demanded is sensitive to price changes or insensitive?
b) Suppose the current market clearing quantity sold is 8. The government is considering implementing an increase in the gas tax on each unit of gasoline to raise revenue. Assume that any change in the tax is passed on entirely to consumers in higher gas prices. Why, given your findings in (a), would you argue against an increase in the tax for the purposes of increasing revenue?