Students are encouraged to collaborate on this assignment. Students may submit assignments in groups up to the size of their presentation groups. Please list the names of all contributors on the first page of the assignment. Late assignments may receive no credit.
1. Net Present Value. You are considering investing in solar panels for your home. The upfront cost today of purchasing the panels is $12,000. The benefit you receive from the panels is equal to $1,000 per year starting next year and continuing in perpetuity. Calculate the year that these solar panels pay for themselves (i.e., have a positive NPV). Consider three different discount rates: 3%, 5%, and 10%.
2. Non-Market Valuation. A recent survey of all recreational fishermen who use Lake Wobegon produced the following data.
|
Origin
|
Per Capita Visitation Rate
|
Total Travel Cost
|
Population
|
|
#1
|
0.040
|
$20.00
|
25,000
|
|
#2
|
0.025
|
$50.00
|
120,000
|
|
#3
|
0.015
|
$70.00
|
133,000
|
Use these data to answer the following questions.
(a) Plot the participation function. Label the axes and the three data points. Provide the equation for the participation function.
(b) On a second graph, draw the demand curves for each origin for recreational fishing services at Lake Wobegon. Label the axes and curves. (Be clear about the units in which you are expressing demand: visits per capita or total visits.)
(c) On the second graph, add the aggregate (market) demand curve.
(d) Calculate consumer surplus for all users from each of the origins and the total surplus for all users from all origins combined.
(e) Do you think that the total surplus you estimated in part (d) provides an unbiased estimate of the economic benefits of recreational fishing on Lake Wobegon? What issues might threaten the unbiasedness of your estimate? Explain.
3. Benefit-Cost Analysis. Answer the following questions from the perspective of an environmental economist. In each question, provide a thoughtful explanation for your response. If you think there are good arguments on both sides of the issue, provide both.
(a) Some environmental laws in the U.S. explicitly prohibit the use of BCA in some areas of environmental policy. For example, the Clean Air Act declares that air quality standards are to be determined purely on the basis of protecting public health with "an adequate margin of safety" and forbids the EPA from considering costs in setting standards. Do you think such an approach is advisable?
(b) Do you think that all U.S. federal government regulations should be subject to a strict BCA test? That is, should it be a rule that a regulation cannot be pursued unless it is expected to generate positive net benefits in the aggregate?
(c) A recent retrospective analysis by the EPA of the net benefits of the Clean Air Act (CAA) finds that the benefits of the CAA outweighted its costs by a factor of 30:1. Is it reasonable to interpret this as evidence that the CAA did not go far enough in regulating air pollution and these regulations should be much more stringent?
4. Pollution Havens. Many environmentalists worry that an unintended consequence of differential enforcement of environmental regulation by nations will lead to a pollution haven effect such that dirty activity will locate in poorer nations where regulation is not enforced.
(a) Read this article,
http://www.nytimes.com/2011/12/09/science/earth/recycled-battery-lead-puts-mexicans-in-danger.html?pagewanted=all
Why is the pollution haven hypothesis more likely to be correct in the case of recycled batteries than in the case of sock production?
(b) Suppose you wanted to write your Ph.D. thesis on testing the pollution haven hypothesis using a statistical analysis. Discuss an ideal experimental design that would allow for a convincing test of this hypothesis.