MSC 491

Prof. Letson

Exam I: February 22, 2006 Name_____________________________

Please answer each question. Four questions. 25 points each.

(1) What are consumer surplus and producer surplus and how are these concepts used to evaluate natural resource management and policy alternatives? As part of your answer, define “supply” and “demand”, and show or describe how they influence consumer surplus and producer surplus. Suppose that demand is P = 80 - Q and that supply is MC = 3 * Q, where P is price, Q is the quantity transacted and MC is marginal cost. (a) What will be the equilibrium quantity transacted? (b) What are the net benefits? (Hint: Recall that the area of a right triangle is ½ * base * height.)

(2) Define discounting. What two fundamental reasons, based in economic theory, have we discussed for discounting? Explain the relationship between the discount rate and natural resource usage. What reason does Tim Brennan give for the controversy surrounding discounting?

(3) Discuss the inverted-U hypothesis. Why might richer nations be cleaner? Why not? Is there a reliable empirical relationship between a nation’s per capita income and its environmental quality? Explain the implications of the inverted-U hypothesis for environmental and economic policy.

(4) What are WTP and WTA and why do they differ in practice? When is each appropriate?

MSC 491

Prof. Letson

Exam II: March 29, 2006 Name_____________________________

Please read each carefully and answer each in its entirety.

(1) (30 points) Explain the Coase Theorem. Explain how the Coase Theorem has been criticized. How is it useful in describing why natural resource conflicts occur and how they might be resolved?

(2) (30 points) Explain how an effluent tax can improve efficiency. Your answer should discuss both the level of externality and the possibility of substituting effluent taxes for other types of taxes. What do the slopes of cost and benefit functions tell us about the efficiency of a tax as compared to a tradable permits approach? Who was Arthur Pigou?

(3) (30 points) What is the contingent valuation method (CV)? Explain how CV is undertaken. Explain the “embedding” and “external validation” criticisms offered of CV. Under what circumstances is CV most useful? What two federal laws have enhanced interest in CV by specifically calling for its use in natural resource damage assessments?

(4) (10 points) Of the topics we have covered so far in the class, which have you liked the most and why? Which have you liked the least? Of the material we have covered so far, do you have a favorite reading or one that you particularly did not like?

MSC 491

Prof. Letson

Exam III: May 10, 2006 Name_____________________________

Each question is work 25%. Please read each carefully and answer each in its entirety.

(1) Explain Hotelling’s Rule for the intertemporal allocation of exhaustible resources. Why is this a market equilibrium condition? Be sure to mention the two alternative ways an owner can use a resource. How could you use Hotelling’s Rule to explain the decades long decline in real prices of many minerals? (Recall the bet that Paul Ehrlich lost to Julian Simon.) As a numerical example, suppose we want to allocate exhaustible resource use over two periods, where P = 16 ‑ 0.8 * Q is the demand function for each period. Let the discount rate be 5% and marginal extraction costs, $4/unit. We have a total of 20 units of the resource to allocate. What is the allocation that maximizes net present value? What is the marginal user cost?

(2) What are individual transferable quotas (ITQs)? Define open access in a fishery, and explain how ITQs are supposed to help. What are some reasons why ITQs might not work? Why is the transferability of ITQs a desirable feature, at least to economists? Should an ITQ program be based on maximum sustainable yield or maximum economic yield? Why does it matter which concept we use?

(3) What economic defense exists for investing resources in protection against the possible effects of global climate change? Your answer should discuss the potential economic costs of global climate change, as well as the costs of preventing or postponing its onset. You should also include should include a discussion of “no regrets” options. What is joint implementation and what might it be economically desirable? Explain why protective action is a global public good and why many nations have an incentive to free ride on the protective efforts of others

(4) What economic reasons can you give why some natural resource rich nations have not become wealthy? Why have some natural resource poor nations become rich? Explain what economists mean by the term “Dutch disease.” What must be true of the nation for natural resource discoveries to hurt its economic performance?