University of British Columbia

Vancouver School of Economics

Economics 371 (001)

Economics of the Environment
Winter Session, Term 2, 2015
M. Vaney

Midterm Examination
name

Part Points Available Points Earned

A.1 5
A.2 5
A.3 5
A.4 5
B.1 20
B.2 20
C.1 10
Total 70

Time Allowed: 75 Minutes

ANSWER ALL PARTS OF THE EXAMINATION.

CHECK LAST NAME AND STUDENT NUMBER ON THIS PAGE.

SIGN BELOW YOUR LAST NAME

PART A: Answer all 4 questions. Each question is worth 5 marks.

1. Provide brief de…nitions or descriptions of (i) non-accumulative wastes, (ii) episodic wastes/pollution,
(iii) assimilative capacity, (iv) non-point source wastes/pollution.

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2. What is Willingness to Accept (WTA) as it applies to valuing an environmental change? Suppose
a consumer has M dollars of income. The consumer receives utility from consumption of goods
and the level of provision of an environmental good (eg. clean air or water). The environmental
good is available at a speci…c level at zero price. Show the WTA related to a change in the
provision of the level of the environmental good from E0 to E1 .

income (all other goods)

M
U1

U0

environmental good
E0 E1

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3. What is meant by the ‘Rule of Capture’? Explain how it relates to problems in Open Access or
Common Property/Pool resources.

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4. What are the features of environmental goods such as ‘protection from climate change’or ‘water
quality in a lake’ or ‘airshed quality’? Explain how the Social Marginal Bene…ts are derived
for such goods. Show the derivation using the following …gure that shows demand for the
environmental good for 2 individuals (solid line and dashed line).

100
p
90

80

70

60

50

40

30

20

10

0
0 10 20 30 40 50 60 70 80
q

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PART B: Answer both questions. Each question is worth 20 marks.
1. Refer to the following …gure when answering this question. lowercase a; b; : : : ; z,numbers 1; 2; : : : ; 9,
and double-lowercase aa and bb denote areas/resions in the graph. (Areas 6 and 9 reference
smaller areas indicated by the arrows). M1 ; M2 ; M3 and M4 refer to marginal functions. P1 ; P2 ; P3
and P4 are measures along the vertical axis and Q1 ; Q2 ; Q3 and Q4 are quantity levels.

M3

b
d g
a
c e f
P4
i j m n
h o M4
k L
P3
s v w
p t
q r u
P2
x y z 1 2 3
4 5
P1
8 aa
7
bb
6 9

M2 M1

Q
Q1 Q2 Q3 Q4

(a) Suppose that M2 represents market demand and M4 represents industry supply in a perfectly
competitive market. There are no externalities. Complete the following table: (5 marks)
Price (P)
Quantity (Q)
Consumer Surplus (areas)
Producer Surplus (areas)

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(b) Suppose that M2 represents market demand. Industry Supply is upward-sloping. There
is a negative externality associated with production. Identify the M line associated with
M C private and the M line associated with M C social . Identify the socially optimal level of
production, QSO : Identify the areas associated with External Costs at the Social optimum.
(5 marks)

MCprivate (M)
MCsocial (M)
Qsocial optimal
External Costs (areas)

(c) Suppose that M1 represents private Marginal Bene…ts and M2 represents Social Marginal
Bene…ts. M4 represents Social Marginal Costs. Explain whether there is a negative or posi-
tive externality and whether that externality is associated with production or consumption
in the market. (4 marks)

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(d) Suppose that M1 = M B priv = M B social and M4 represents industry supply in a perfectly
competitive market. M3 represents Social Marginal Costs. For the privately optimal out-
come, write out the Total Surplus as the sum of many smaller areas (pay attention to signs
+ or ). (6 marks)

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2. An environmental regulator wishes to regulate the emissions of a …rm using an emissions fee,
r. For the …rm, higher levels of emissions reduce the cost of producing a given level of output
and give rise to a Marginal Savings function M S(e) = M C(e). For the rest of society, higher
emissions impose a harm described by a Marginal Damages function, M D(e) = 5e 20. The
…rm is either a Low or High cost …rm with:

M SL (e) = 90 6eL
M SH (e) = 100 eH

(a) If the regulator knows that a …rm is a High cost …rm, determine the emissions fee, rH that
should be set in order to minimize Social Losses? (5 marks)

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(b) What is the level of emissions, eH ; produced by the High cost …rm in (a)? If emissions
impose a harm (marginal damages) explain why eH > 0 is optimal? (5 marks)

(c) Will the optimal rL be higher, lower or the same as rH ? (4 marks)

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(d) Suppose the regulator is unable to observe the type of the …rm. The regulator does know
that P (High Cost) = 35 and P (Low Cost) = 25 . Calculate the expected social losses if the
regulator sets the emissions fee based on the type reported by the …rm (note: the regulator
is not able to verify the true type of the …rm). The fee schedule will be

rL if …rm reports type L

r=
rH if …rm reports type H

A …rm may set any level of emissions as long as it pays the appropriate fee. (6 marks)

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PART C: Answer this question. This question is worth 10 marks.

1. Read the following excerpt from an article that appeared in the New York Times (Should We
Tax People for Being Annoying, Adam Davidson, January 8, 2013).

Should We Tax People for Being Annoying?

By ADAM DAVIDSON

Published: January 8, 2013

Driving home during the holidays, I found myself trapped in the permanent
traffic jam on I-95 near Bridgeport, Conn. In the back seat, my son was
screaming. All around, drivers had the menaced, lifeless expressions that
people get when they see cars lined up to the horizon. It was enough to make
me wish for congestion pricing — a tax paid by drivers to enter crowded areas
at peak times. After all, it costs drivers about $16 to enter central London
during working hours. A few years ago, it nearly caught on in New York. And
on that drive home, I would have happily paid whatever it cost to persuade
some other drivers that it wasn’t worth it for them to be on the road.

Instead, we all suffered. Each car added an uncharged burden to every other
person. In fact, everyone on the road was doing all sorts of harm to society
without paying the cost. I drove about 150 miles that day and emitted,
according to E.P.A. data, about 140 pounds of carbon dioxide. My very
presence also increased (albeit infinitesimally) the likelihood of a traffic
accident, further dependence on foreign oil and the proliferation of urban
sprawl. According to an influential study by the I.M.F. economist Ian Parry, my
hours on the road cost society around $10. Add up all the cars in all the traffic
jams across the country, and it’s clear that drivers are costing hundreds of
billions of dollars a year that we don’t pay for. ...

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(a) The I-95 (Interstate 95 - a divided highway) around Bridgeport, Connecticut is not a toll-
road. What characteristics does this good have? Bridgeport, CT is located in Fair…eld
County which has a population density of 566=km2 . Explain whether a non-toll, divided
highway located in Missoula County, Montana (the I-90) would have the same characteris-
tics. The population density of Missoula County is 16=km2 . (5 marks)

(b) In the second paragraph of the article there is reference to ‘all sorts of harm to society
without paying the cost’. What type of market failure is the author referring to? Graph
the author’s demand for driving and show in the graph where ‘my hours on the road cost
society around $10’. (5 marks)

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