无代写-UTS 23570
时间:2022-10-30
Practice questions for final exam
UTS 23570 Economics of the Environment

(Suggested solutions)

Question 1
(a) Profits (= PS) rise by more than consumer surplus falls under free trade. The gains of
trade are measured as a quasi-triangle below exports and above A.
(b) Yes, because consumption is lower under free trade than autarky, not only does the
standard proof work; it is actually strengthened because the externalities (arising from
consumption) are less. Note, this is only true if you ignore the externalities where the
good is finally exported to.
(c) Not necessarily, because production has gone up, there are now additional production
externalities. These may outweigh the gains mentioned in (a).
(d) It would help to consider the problems from a consumption point of view; coal
exported will be burnt somewhere. It is difficult to measure these externalities, but
any attempt leads to them being taken more seriously. Finally, pushing for uniform
health and safety standards would, if feasible, reduce incentives for trade to take the
path of production locating to the most lax jurisdiction.


Question 2
(a) The scarcity rent or the marginal user cost.
(b) 6/(1+r)=5.45 => r=0.1 (or 10%)
(c) It would fall. (More weight would now be placed on period 2.)
(d) It would decrease.
(e) It would stretch out along the bottom axis. Both the optimal consumption in period 1
and 2 would increase and the scarcity rent would fall.
(f) MNB1 = 6 – 0.4Q1 = (6 – 0.4Q2)/(1+r). Use r=0.1 and Q2 = 20- Q1. 6.6 – 0.44 Q1 = 6 –
0.4*(20- Q1). After some algebra, you will find Q1 = 10.24 and Q2 = 9.76.


Question 3
Some elements to include:
1. The market mechanism of increased prices (which reflect increasing scarcity) will aid
innovation and will create incentives to 1) recycle and 2) find substitutes
2. In the limit, some resources have non-depletable alternatives; sunlight will always be
available for some energy
But
3. A price of infinity is equivalent to running out, and very high prices render the
resource use impractical
4. Some things are not replaceable at any price, like an atmosphere
5. Markets need to price in all externalities to get efficient (either static or dynamic)
outcomes
6. Markets need property rights to work properly; fortunately, many mined resources do
make it easy to define property rights
It is probably best to evaluate each resource on a case by case basis.


Question 4
a) i) Hartwick rule (weak sustainability): Invest scarcity rent from environmental
endowment into capital. Keep capital + natural stock constant, only consume
interests.
ii) Strong sustainability: maintaining the value of natural capital
iii) Environmental sustainability: requires to maintain certain physical flows
of certain key individual resources
Environmental sustainability is the strictest sustainability criterion, the Hartwick
rule the weakest.

b) Which of the following examples violate any (or several) of the sustainability
criteria? Which criterion is violated (if any)? Briefly explain your answer.
a. Norwegian Oil Fund is weakly sustainable (as it invests all the proceeds into
the fund and only consumes the interests of the investment) but it violates
strong and environmental sustainability because it decreases the natural
capital.
b. Nauru phosphate mining & trust fund was set up to be a weakly sustainable
fund but violating strong and environmental sustainability. Mismanagement
has led to a massive loss in the fund’s value. Together with a mostly destroyed
environment, Nauru finds itself in a difficult economic situation. It is an
example of weak sustainability not necessarily being enough.
c. Unless you have an ecological footprint below 1 (which is virtually impossible
for an Australian), you are violating environmental sustainability. Most likely
you are also violating strong and weak sustainability with your lifestyle
(unless you save a big share of your income to pass it on to future
generations).
d. Extinction of species is an example of a violation of strong (and
environmental) sustainability.


Question 5
a) [See lecture notes on Water]
b) Ground water is more abundant than surface water, 90% of all fresh water is
groundwater. However, groundwater is a depletable resource whereas surface water is
renewable. There are some interactions between ground and surface water.
c) Groundwater: depletable resource model with a renewable alternative over multiple
periods. Surface water: Static model with demand of different users and a fixed (but
over time variable) supply of water.
d) Issues surrounding the management of freshwater include (describe two):
a. Restrictions on water transfers
b. Unjustified subsidies
c. Inefficiently low pricing of water, ie. not including water scarcity rent
d. Instream flows
e. Common property rights
e) Possible remedies or reform could be: [For a description, see lecture notes]
a. Efficient water pricing (price as a function of volume, factoring in scarcity
rent, all users face same prices)
b. Eliminate distortionary subsidies
c. Full cost recovery pricing
d. Water markets (ie., transferable property rights)
e. Environmental water transaction
f. Desalination and Wastewater recycling


Question 6

(a) Optimal in the sense of maximising the net benefit for society (ie., maximising
society’s welfare/maximising the size of the pie).
(b) ‘Optimal’ pollution relies on different assumptions which might not be shared by
everyone. Hence, whether to consider that there is an optimal level of pollution or
if no pollution is optimal is a world view.
(c) As abatement gets more and more lax (ie., there is less of it), the cost of the
abatement measures decreases.
(d) Pollution becomes increasingly damaging at the margin as the level of it rises
(e) To obtain a total, you add up the marginal one by one. If the units are small, this
amounts to working out an area (integral)


Question 7
(a) City stops at Parramatta (ie., intersection of the blue and dashed line) and farms stop at
the intersection of the blue and black solid lines.
(b) Yes, the externality will reduce the valuation of wilderness (at least at the edge of the
farms) and farming will expand further than it would without the externality.
(c) Farming will expand both ways, eating into the city (because of increased valuation of
farming) and it will eat into wilderness (because of reduced valuation of wilderness
and the increased valuation of farming).


Question 8
Global economic development – should include things other than GDP, but even if it doesn’t
there are real externalities associated with pollution, such as climate change.
Sustainability is either: 1. A consumption annuity 2. A dynamically efficient extraction of
non-renewable resources or 3. An untouched natural environment (including no extraction of
non-renewable resources).
Ways in which GED aids sustainability
1. Obviously economic development aids in consumption – if you use the
Hartwick rule (invest scarcity rents) you can sustain consumption arising from
development
2. Environmental amenity is a luxury good and so growth in income gives people
preferences for environmental protection (the environmental Kuznet’s curve).
3. Very controversially, climate change will release some new resources (and
mess up some other ones)
Ways in which it hurts
1. The major concern is that increasing economic activity adds to pollution and
negative externalities (eg Kiribati disappears with global warming)
2. Economic development may promote ethics of free market liberalism. The
individualism of the latter may make externalities worse.
3. Economic growth may break down social conventions on sharing, which have
been used to deal with open access problems (Ostrom on fishing).
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