Download EE Exam 1_Winter 2013

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Environmental Economics
Exam 1
NAME:_______
You have 55 minutes to respond to the following. Please use the space provided for your responses. There is
additional space on the back page.
1. While sitting at a bar in Wasilla, Alaska, you overhear Sarah and Todd arguing about how many tons of halibut
should be harvested in a year. Sarah is arguing that “in order to maximize the economic benefit from the halibut
harvest we need to determine the quantity of halibut that maximizes the difference between the total benefit and total
cost of the harvest”. Todd says, “You’re drunk! We need to use marginal analysis to determine the efficient harvest
level.” Who is right? Use a graph(s) to make your argument. (12 points)
2. Explain the four broad categories of problems that can prevent free markets from allocating resources efficiently.
Use examples from our readings, articles, movies or homework assignments. (12 points)
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3. The Oregon economy can use economic resources to produce combinations of timber and wilderness areas.
a. Use a clearly labeled production possibility frontier to show this tradeoff. (10 points)
b. Using a clearly labeled indifference curve in the graph above, show how the Oregon economy might find the
allocatively efficient quantity of timber and wilderness. Identify the efficient point with as “E”. Identify a point “F”
that is feasible in production but would not be allocatively efficient. (6 points)
c. Why is point E preferred to point F? Use marginal analysis to complete your explanation. (8 points)
4. The market for copper is reflected by the demand and supply relationships below.
Demand: P = 900 – 3.5Qd (Quantity is measured in 1000’s of tons)
Supply: P = 100 + ½ Qs
Suppose copper production causes serious damage to the environment and that these external costs amount to $30
per 1000 tons.
a. Solve for the market equilibrium price and quantity. Show this in a clearly labeled diagram. Calculate consumer
and producer surplus at the market equilibrium. (10 points)
b. Solve for the socially optimal price and quantity of copper and show this in your graph. If the external costs are
ignored, how much deadweight loss exists at the market outcome? Show your work for partial credit. (10 points)
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5. According to the Save Our Seas Foundation:
“Overfishing occurs when fish and other marine species are caught faster than they can reproduce. It is the
result of growing demand for seafood around the world, combined with poor management of fisheries and
the development of new, more effective fishing techniques. If left unchecked, it will destroy the marine
ecosystem and jeopardise the food security of more than a billion people for whom fish are a primary
source of protein.”
Your buddies at the bar, Todd and Sarah, don’t understand why this is happening. Sarah says, “wouldn’t the profit
incentive cause firms to harvest fish at a sustainable rate? The competitive marketplace should fix this problem!”
Use your economics knowledge to explain to them why ocean species tend to be overfished and why the overfishing
is entirely predictable, especially in a competitive marketplace. (10 point)
6. Explain the reasons why GDP is not a good measure of social welfare. (12 points)
7. The college is considering an investment of $120,000 today in new air-conditioning units. These are supposed to
reduce electricity expenses by $50,000 for the next 3 years. If the prevailing interest rate is 1.5%, is the investment
dynamically efficient? Show your work. (10 points)
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