Natural Resource Economics Midterm Set 2

Front 1

Answer the following question in a positive and normative response:

Policy issue: Tax a product whose production or consumption generates negative externalities?

Back 1

Positive question: What can we expect to be the observable effects of this tax in the short and long run?

Normative question Should we implement this tax, given the effects it will have?

Front 2

What are Anthropocentric values?

Back 2

-Value of natural environment to other species is captured to the extent that humans care about the wellbeing of other species (role for advocacy)

-Natural environment has value to humans if humans are willing to give up (trade off) other consumption to protect/preserve/enhance that aspect of the natural environment

-Trade offs need not always happen in markets

Under market failures, trade offs might not be possible, but willingness to make them counts as demand

Front 3

What is the Economics objective function?

Back 3

Maximize overall net social benefits = social benefits – social costs (includes external benefits and costs)

NOT “maximize environmental quality”

NOT “maximize resource reserves”

Front 4

What does the full protection of the environment and natural resources lead to?

Back 4

Opportunity costs for society

Front 5

What is Arrow’s Theorem?

Back 5

Any SWF (Social Welfare Func.) that respects transitivity, unanimity, and independence of irrelevant alternatives is a dictatorship.

You have only four choices:

-Violate transitivity (like majority voting)

-Violate unanimity (like a fixed SWF that ignores individual preferences)

-Violate IIA (something like a “Borda count” assign points for each rank... e.g. 3pts for first, 2pts for second, 1pt for third)

Settle for a dictatorship

Front 6

How is Arrow’s Theorem questioned?

Back 6

-No candidate SWF satisfies all of the basic characteristics we would like it to have

-Economists generally “make do” with a strategy of converting utility to dollars worth of benefits (monetization) and then adding the monetary amounts to achieve a benefits measure

-Shortcoming: requires an assumption that everyone have the same marginal utility of a dollar

Front 7

What can a Benefit Cost Analysis do?

Back 7

BCA informs decision making, but it should not be used (exclusively) to MAKE decisions

Front 8

What are Static efficient “allocations?”

Back 8

Maximizing net social benefits in the current period means pursuing an activity only as far as the point where one more unit would produce marginal social benefits that start to fall short of marginal social (opportunity) costs. MB=MC or MNB=0

-You don’t want to consume/produce any more if it means you/society will have to give up other things that have greater value than you/society will get from the activity in question

Front 9

What is the Avoided Cost Method?

Back 9

One benefit of climate protection is likely to be a reduction in the number of extreme weather events. If we prevent climate change, we will incur fewer costs for hurricane clean up, enhanced storm water handling systems, tornado shelters, etc.

-Avoidance of these costs is a “benefit from climate protection

Front 10

What is the Defensive Expenditures Method?

Back 10

Rather that the cost of ex post remedies for consequences, we might use the cost of ex ante prevention of consequences:

Example 1: Value of clean drinking water might be approximated by the amount we are willing to pay for bottled water, filtration systems, or reverse osmosis

Front 11

What is the Replacement Cost Method?

Back 11

Value of preventing ecological damage can be measured by what it would cost to replicate ecosystem services

Example 1: One of the ecosystem services provided by forests is erosion control. If the forest was eliminated, we would have to spend money on human made soil retention technologies

Front 12

What are the “Revealed Preference” Methods?

Back 12

Economists prefer to use evidence of real tradeoffs when they infer people’s WTP for environmental goods

-May not directly observe people buying environmental quality, but can observe people buying things for which environmental quality is an attribute of the good

-Demand function will shift with quality of the good

Example: Demand at lake affected by invasive species

Front 13

What is a policy problem with BCA?

Back 13

-Suppose the status quo is a healthy recreational fishery (and sometimes a commercial fishery as well)

-Invasive species decimates the fish stock; recreational anglers lose utility (commercial fishers lose revenues)

-Propose: Costly intervention to restore the fishery

Question: Will social benefits to recreational anglers (and possibly commercial fishers) outweigh the social costs of the intervention (including any perceived risks of the intervention)?

Front 14

What is the Travel cost method (TCM)?

Back 14

-Conventional demand analysis assumes that gaining access􏰁to point of purchase is costless, posted supermarket shelf price is “full cost”

-But even cost of a quart of milk requires that you get to􏰁the store (although travel cost small enough to ignore?)

-For recreational demands, entry fee may be free or nominal, travel cost is the majority of the “full cost” of consumption

-Exploit access cost as a proxy for the “shelf price” and use conventional economic methods