Environmental Economics
Final Exam Practice Questions
Environmental Economics Please circle the correct answer for each question. If you make a mistake or wish to change your answer, please ···
1 Multiple choice questions (3 points each) Environmental Economics
Please circle the correct answer for each question. If you make a mistake or wish to change your answer, please unambiguously cross out the incorrect choice and circle your new answer.
- Theconcept of “Gamma discounting”
- isrelevant to cases where there is disagreement over the true discount
- impliesthat the effective discount rate should be declining over
- reflectsthe fact that man-made and natural goods are imperfect
- Answers(a) and (b) are both
- Answers(a), (b), and (c) are all
- Whichis not a potential source of inefficiency for command-and-control pollution regulation?
- Theassumption of sharp thresholds in damages (e.g. related to human health).
- Negligiblecosts associated with non-attainment imply no incentives to
- Uniformstandards imposed across wide
- Inabilityto account for temporal variation (e.g. pollution by time of day or season).
- Emphasison “end-of-pipe” control technologies as opposed to pollution
- Afuel efficiency standard like that imposed by the US Corporate Average Fuel Economy (CAFE) initiative
- onlytargets newly manufactured vehicles and thus can take a long time to impact the over- all fuel economy of a county’s car
- ismistaken in its assumption that motorists underestimate savings from efficiency
- avoids the rebound
- ignorespotential spillover benefits like reduced dependence on foreign
- All of the
- Anadvantage of cap-and-trade is that it encourages investment in new technologies by ensuring a stable permit
- Recentempirical evidence does not offer much support for the Environmental Kuznets
2 Part 2: Longer questions Environmental Economics
2.1 The Ramsey Rule
Nicholas Stern used the so-called “Ramsey Rule” to derive an unusually low social discount rate of 1.4% in his influential Review on the Economics of Climate Change (2006). Write out the Ramsey Rule formula. (25%) Name the various input parameters in this formula and give a very brief, intuitive description of their respective roles. (75%)
2.2 Mobile air pollution
Give three reasons that electric vehicles could be viewed as environmentally-friendly, even though they require electricity. (75%) Give one reason that autonomous vehicles might help to reduce pollu- tion in the future. (25%)
3 Analysis questions
3.1 Cap-and-trade
Consider an island in which all electricity is provided by two coal-fired power plants. Unfortunately, while the production of electricity brings important benefits to the island community, it also results in the release of SO2 emissions that are causing harmful acid rain and related human health issues. To fix these problems, island officials decide to implement a tradeable permit system, where each permit is worth one tonne of SO2. The total cap is set equivalent to 20 tonnes of SO2 abatement and the initial permit allocation is divided equally among the plants (i.e each plant received 10 permits). The respective marginal abatement costs of the two plants, in terms of dollars per Ai tonnes, are as follows:
MAC1 = 2 + 1 A1
MAC2 = 3 A2
3.1.1 How much SO2 does each power plant abate in equilibrium after trading is completed? What is the corresponding permit price? Environmental Economics
- Now,consider an alternative scenario in which the regulator had instead decided to reach the abatement target by imposing a uniform abatement standard of 10 tonnes each. What is the corresponding marginal abatement cost for each plant under this uniform standard, where no trading is allowed?
- Sketcha simple figure of this problem in the style of the “bathtub” diagram that we practiced in class. Make sure to highlight the following: i) The equilibrium permit price and abatement quantities of the two plants under the tradeable permit system. ii) The marginal abatement costs of each plant under the uniform abatement iii) The regions corresponding to the gains from trade that each plant experiences under the permit system relative to the uniform abatement standard.Now, calculate the gains from trade that each power plant experiences due to the tradeable permit system relative to the uniform abatement
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