Natural Resource Economics Midterm Set Critical Set 1

Front 1

Under what circumstances would a deontological basis for the allocation of environmental resources be most likely to be successful?

When is a teleological framework more appropriate?

Which approach is the basis for benefit-cost analysis as it is employed by economists?

Back 1

-A deontological basis is viable if preferences are homogeneous throughout the population that will be affected by some change in the allocation of resources. Then perhaps everyone will agree about the intrinsic value of different allocations

-A teleological framework is more viable in a pluralistic society, where people disagree about what constitutes the “highest and best use” for the resource. In this case, there needs to be some way to figure out how to do what is best for society overall (in some sense). To figure this out, you need to define what goal you are trying to achieve, and this goal defines related hypothetical imperatives

-Economists choose “maximize overall social welfare” and thus make their teleological system the framework for benefit-cost analysis. This requires knowing what a proposed change will do to each person’s utility level, and converting this utility difference into an equivalent difference in income. Then, with the non-trivial assumption that everyone shares the same marginal utility of income, these monetized gains and losses can be aggregated across the population

Front 2

Explain the difference between a true Pareto improvement and a potential Pareto improvement.

If efficiency is what we seek to maximize, why are we enthusiastic about potential Pareto improvements even if they leave some people worse off?

Are economists so heartless as to care nothing about people who are on the losing end of a policy?

Back 2

-A true Pareto improvement is some change that makes nobody worse off and at least one person better off.

-A potential Pareto improvement typically involves some winners and some losers, but the gains to the winners are sufficient to more than offset the losses to the losers

-Economists, personally, often do care very much about the equity consequences of policies, but they try not to confound normative distributional decisions with positive questions about efficiency. They do, however, have an obligation to provide information about the distributional consequences of policies, as they learn about these, so that elected decision-makers can weigh the equity consequences of a proposed policy in whatever manner they choose

Front 3

Is it true that economists, themselves, think up the number that the EPA uses to decide what your life is worth when the agency is contemplating a new environmental regulation?

Where do these numbers come from, and why do we need them?

Back 3

-Economists do not rely on their own intuition or expertise to “think up” a number to use for the value of a human life. Instead, they strive to collect data on the types of tradeoffs that a representative sample of the population has actually demonstrated that they are willing to make

-The mortality risk changes in question should be of similar magnitude to the mortality risks that would be reduced through a proposed environmental regulation. People regularly make tradeoffs between small mortality risks and money

-We need to know people’s WTP to reduce policy-sized environmental risks because most such risk reductions come about because of environmental regulations. These are not gifts to the population, but unfunded mandates in most cases. We don’t want to force people to consume more of this public good than they would choose for themselves, given their budget constraints

Front 4

What conditions are necessary if you want to use the travel cost method to value improved environmental quality?

Back 4

* Need to observe people traveling to consume nonmarket environmental good (not good for air quality where you live)
* Good needs to be located at well-defined site
* Doesn’t work if almost nobody goes there (ANWR?)
* Doesn’t work well if there isn’t a lot of variability in how far people travel (i.e. insufficient variation in price—can’t get slope)
* Need variation in environmental quality while data are being collected (sometimes hard to anticipate an important change in quality)…Retrospective trip data tend to be less reliable
* Sometimes have to resort to counterfactual trips (where would you have gone, how often? Where will you go, how often?) …stated behavior, not “revealed” behavior

Front 5

Stated preferences can be the only available way to learn about “non-user” willingness to pay for an improvement in environmental quality. Under what circumstances might an economist prefer to use the “referendum contingent valuation” method and when might a full “conjoint analysis” be more appropriate?

Back 5

-Referendum contingent valuation is a good way to get the most accurate estimate of willingness to pay for a particular “package” of environmental goods.

-This type of survey is very useful when you know exactly what change in environmental quality is to be valued (as in a litigation context, where the courts require a clear and defensible value for exactly what environmental change is in question—for example, as a result of a specific oil spill)

-A conjoint choice type of survey is more useful if you don’t know exactly, in advance, what package of environmental goods needs to be valued.

-A conjoint analysis reveals people’s marginal willingness to pay for different attributes of an environmental change, so that fitted WTP measures can be calculated as needed, from the resulting estimated model, for different mixes of attributes

Front 6

Explain the concept of “marginal user cost” (MUC). Why it is relevant to planning a dynamically efficient extraction path for an exhaustible resource, and when do economists need to worry about measuring it?

Back 6

-It is the additional opportunity cost associated with consumption of an exhaustible resource in the current period stemming from the foregone opportunity to consume that same unit in the future

-Private firms will automatically take their current-period marginal extraction costs into account, but they may neglect the marginal user cost if they have no claim on future profits from the extraction and sale of a given unit of mineral in that future period

-Economists worry about measuring marginal user cost when they need to help governments figure out what royalties might be appropriate as a substitute for firms’ attention to marginal user costs. The four main factors which determine marginal user costs are marginal benefits and marginal extraction costs from the use of the resource (combined into MNB in each period) as well as the discount rate and the size of the resource stock

Front 7

Many economists are skeptical of “stated preference” (SP) demand data, and prefer to rely only on “revealed preference” (RP) demand information. In spite of this skepticism, market researchers often collect this type of demand data for use in predicting likely demand for potential new products. How does the use of SP data in environmental economics differ fundamentally from its use in marketing?

Back 7

-In a marketing context, it is possible to go ahead and produce the new product, whereupon actual demand information can be observed and the ex ante predictions about likely demand can be validated with real market data. In the environmental context, the goods to be valued are often fundamentally non-market public goods, which will never be sold in private markets where a conventional demand function could be estimated from revealed preferences. Thus there may be no opportunity to “validate” stated preference research in an environmental context

-We have to assume that the same sorts of conditions, if observed in the environmental context, will lead to similarly reliable estimates of the non-market value of environmental goods. We cannot ever be certain, however

Front 8

Explain how a hedonic property value (HPV) model is used to identify the average extent to which house values have been reduced, as a function of proximity, when a previously unknown toxic waste site is discovered in the neighborhood. Briefly describe the data you would need and write down the kind of “hedonic regression” model that you might run, along with an explanation of that model and any necessary assumptions

Back 8

-Economists sometimes use distance from an environmental disamenity, as a proxy for exposure to a health risk, in regression-based models to explain spatial (and sometimes time-wise) variations in the selling prices of houses. These studies are often limited to just owner-occupied single-family dwellings. Using regression analysis, the strategy is to “control” for a wide variety of confounding factors that might also explain variations in house prices—house structural attributes, neighborhood characteristics (sociodemographics), proximity to other amenities or disamenities, local public goods (school quality, crime rates)—and then to look for residual otherwise unexplained variation that seems to be due to proximity to the environmental problem

-The goal is to identify a distance profile for average housing prices, measured away from the location of the problem. The logic is that if there was no problem, housing prices would not vary with distance from this site

Front 9

Suppose you have identified the extent to which average house values are affected by proximity to a newly discovered toxic waste site. Does this information convey the loss of consumer surplus associated with the existence of the toxic waste site? Why or why not?

Back 9

-There are two stages to hedonic property value analysis. The first stage identifies the marginal price (marginal WTP) per unit of environmental quality using a hedonic property value regression based on data where perceived environmental quality varies as a function of distance from the toxic site. This is a measure of how far the demand/WTP curve for housing shifts up or down when there is a change in environmental quality. It produces enough information to plot one “price per unit” or a single point on the demand curve for environmental quality

-If a difference occurs over a short enough time period that the short-run supply of housing is fixed (i.e. so that the housing market has not had time to re-equilibrate), these lost property values can be used as evidence that home owners have been harmed

* Second step: Demand function for environmental quality typically requires observations on quantity of environmental quality demanded at several different marginal prices (e.g. across neighborhoods, as a function of incomes, other prices, etc.)
* This step is non-trivial. Rarely done well or thoroughly. Researchers continue to look for ways around this problem

Front 10

The Hotelling Rule suggests that the net price of an exhaustible resource should rise over time at the rate of discount/interest. Do we tend to observe this pattern in the data? Why or why not?

Back 10

Reasons why the implications of the Hotelling Rule for net prices of exhaustible resources (i.e. they should rise over time at the rate of discount/interest) is typically not apparent in the data on gross prices:

* We usually observe gross prices, not prices net of marginal extraction costs
* Falling marginal costs of extraction when extraction rates decrease over time (upward sloping MEC curves)
* Technological progress = falling extraction costs at all current output levels
* Rising marginal extraction costs with cumulative extractions
* Shifting demand (technology providing better substitutes, cross-price elasticities of demand)
* Exploration = increasing reserves (more reserves, lower marginal user costs)

Front 11

In environmental regulation and litigation it is sometimes necessary to estimate monetized values of what people are willing to give up to prevent future environmental damage (or what compensation they are entitled to receive for environmental damage that has already happened). Where do these numbers come from? Is new research done every time a number is needed? When is new analysis warranted, and who pays for it?

Back 11

-For injuries which are sufficiently different than those which have already been studied (e.g. much larger, or of a different type), new research may be necessary. Researchers may decide to do hedonic property value studies, travel cost studies, site choice studies, or stated preference surveys

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or regulations, they are typically paid for by tax dollars. For litigation, if the plaintiff’s (e.g. government’s) case is successful, it is often the defendant, if found at fault, who ends up paying for all the costs of the litigation. When the compensatory and punitive damages are likely to be huge, as for a major oil spill affecting new types of ecosystems not previously valued for oil damages, the cost of such a study can be extremely large