Natural Resource Economics Midterm Final Set 1

Front 1

Describe Forestry.

Describe Fisheries.

Back 1

FORESTRY:

An extension of crop farming to encompass long lived species on public as well as private lands

FISHERIES:

An extension of livestock farming to encompass migratory species (“wildlife”) where there is no system of property rights
Minerals/Energy

Front 2

What are Hypothetical imperatives?

Back 2

If you want this, you must do this

Front 3

What are Anthropocentric values?

Back 3

-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 4

What is the Economics objective function?

Back 4

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

Front 5

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 5

-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 6

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

Back 6

* 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 7

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 7

-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 8

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 8

-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 9

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 9

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 10

-If there are many close substitutes for an environmental good, where people could travel to visit other sites if the site in question is compromised, we need to be careful not to overstate the potential for lost consumer surplus if the site is no longer available

Stated preference methods include contingent valuation (CV) methods and conjoint analyses (CA). CV methods tend to be best when there is exactly one policy scenario for which you wish to learn about society’s WTP, and you want to maximize the precision with which WTP for that one policy can be estimated. Explain when it would be safer for researchers to do a conjoint analysis study instead, and why.

Back 10

-Conjoint analyses can help economists measure the marginal utility associated with different policy attributes, so that later on, after the study is done, you can propose a policy with some new mix of attributes (where that particular mix was spanned by, but not specifically included in, the study scenarios). You can plug this new mix into the estimated WTP function to predict what people would have been willing to pay for that

-CV, in the case where just one “bundle” of attributes is valued, can leave researchers vulnerable to being unable to value any different bundle that consists of different amounts of the same attributes

Front 11

What distinguishes “dynamic” efficiency from “static” efficiency? Why is there always a degree of controversy about “the” discount rate to use when assessing the dynamic efficiency? Are economists confident that a net benefit accruing T periods in the future can always be converted into an equivalent current-period net benefit by multiplying by ? Why or why not?

Back 11

-Static efficiency is said to have been achieved if the optimization problem starts afresh in each period, so all that is necessary is to expand production/consumption as long as the marginal benefits of an extra unit exceed the marginal costs of an extra unit. When marginal benefits equal marginal costs, we maximize overall net benefits associated with a particular activity.

-Dynamic efficiency is relevant when decisions in one period affect opportunities in a subsequent period, as in the case of exploiting an exhaustible mineral. In that case, we seek to maximize the present discounted value of the stream of future net benefits. Thus discounting is required. The discount formula shown is merely mathematically convenient

-It has the basic necessary property that net benefits accruing sooner will be discounted less, and net benefits accruing later will be discounted more, but there is plenty of evidence that this standard formula isn’t an exact match for the choices that are derived from actual people’s time preferences for present versus future consumption.

Front 12

Why were there no major lawsuits, prior to the litigation surrounding the 1989 Exxon Valdez oil spill, where attorneys and legal experts argued about estimation of “lost passive use value” as a component of compensatory (economic) damages caused by accidents related to natural resource exploitation and use? In what sense did the Exxon case change the playing field for non-market resource valuation research?

Back 12

-Lost passive use value was not considered to be admissible until the “Ohio” case early in 1989. That case established a legal precedent that natural resources could have legitimate economic value beyond just conventional “use” values

-People who had been injured by harm to a resource that they did not actually personally use experienced a genuine loss of utility that was determined in the Ohio case to be legitimate grounds for a claim to compensation. Prior to the Ohio case, you did not have any legal standing to seek compensation for lost passive use value because only active users were deemed eligible for compensation

Front 13

Environmental advocacy groups are often opposed to benefit-cost analysis (BCA) of proposed environmental policies. What are they afraid will happen, if a BCA is conducted? What is the proper role of BCA from the perspective of economists? Be sure to mention what BCA cannot do, and why.

Back 13

-Environmental advocacy groups sometimes fear that benefit-cost analysis will be used as the sole criterion for deciding whether to go ahead with a proposed reallocation of society’s resources

-From the perspective of economists, the proper role of BCA is to inform decisions, not to make decisions

-BCA in the US tends to assume that the marginal utility of a dollar worth of benefits is the same for everyone. It is pretty clear that this is not supported empirically, but no assumption other than “equal marginal utility of money/income” is any more supportable than that assumption

-BCA can be used to assess the “efficiency” of a proposed policy (reallocation) but it cannot help us understand whether we like the distributional (equity) consequences of the policy. Benefit-cost analysis typically focuses on the overall net social benefits, rather than the distribution across individuals of individual net benefits from a policy