Exam Format
The final exam will be closed-book and closed-notes, and all students will need to complete the exam individually. Calculators will be permitted but are not necessary.
The exam will consist of a series of short answer questions, some of which may require some math though most of which will not. The questions will be based on the lecture notes, readings from the text (Keohane and Olmstead), and the other assigned readings from the course that were discussed in class:
• Hahn and Dudley "How Well Does the U.S. Government Do Benefit-Cost Analysis?"
• Pasurka "Perspectives on Pollution Abatement and Competitiveness"
• Muehlenbachs, Spiller, and Timmins "Shale Gas Development and Property Values"
• Kling et al. "From Exxon to BP: Has Some Number Become Better than No Number?"
• Olmstead and Stavins "Three Key Elements of the Post-2012 International Climate Policy Architecture"
• Dasgupta et al. "Confronting the Environmental Kuznets Curve"
• McKibben "Global Warming's Terrifying New Math" From the text, the relevant chapters are 2-5 and 11.
Topics and Sample Questions
Market Failures and Government Intervention
1. Explain the case for government intervention in the environmental realm. What reasons do we have to suspect that the market will not deliver the efficient level of pollution / pollution abatement? Give two examples that illustrate different situations when the market is not achieving the efficient level of environmental quality. What do Keohane and Olmstead cite as the main underlying cause of the problem?
2. In the article you read, Bill McKibben says, "Alone among the businesses, the fossil- fuel industry is allowed to dump its main waste, carbon dioxide, for free." What is it that "allows" the fossil-fuel industry to dump its waste, and why isn't the market solving this problem? What does Bill McKibben (or any environmental economist) think needs to be done to correct this problem?
Regulation, Beneftt-Cost Analysis
1. Describe the theoretical foundation for benefit-cost analysis. What does it mean if we estimate that a policy has positive net benefits? In your answer, include the definitions of efficiency and the Kaldor-Hicks criterion.
2. As part of UB's efforts to reduce energy use, your dorm is considering a project to install LED lights, which are more expensive than currently used fluorescent lights but last longer and use less energy.
(a) Define net present value (NPV) analysis, and describe how you would use this method to evaluate this proposal, assuming there are no alternative energy- demand proposals under consideration, apart from the status quo.
(b) What is the role of discounting in NPV? Aside from inflation, give two reasons why a dollar today is not worth the same amount as a dollar tomorrow.
(c) Assume that the benefits of the lights have been estimated to be $3,000 per year over their three-year life. The up-front costs of the lighting (in the first period) are estimated at $7,000. The discount rate (interest rate) is 10%. Write out the equation for NPV and explain how you would interpret the result. You do not have to solve the equation.
3. Arrow et al. (1996) state that BCA should be required of all major regulatory decisions but yet that it should not be viewed as "either necessary or sufficient for designing sensible public policy." Explain their rationale.
4. True/False. Positive net benefits is both a necessary and sufficient condition for optimal environmental policy. Explain.
5. According to your reading of the article by Hahn and Dudley, how well does the U.S. government do benefit-cost analysis? On what evidence is their conclusion based, and what explanation do they offer of the finding? Provide one of their "modest" recommendations.
6. In your reading, Pasurka describes different perspectives on how regulation might affect competitiveness. Define the pollution haven hypothesis and pollution haven effects in the context of the the relationship between regulation and competitiveness. Is there empirical evidence to support the existence of the hypothesis and/or the effect?
Non-market Valuation
1. What makes estimating the benefits of environmental amenities much more difficult than estimating the benefits of a pair of shoes? List the methods we covered in this course to estimate the benefits of environmental goods and services. For each, in a few sentences, give an intuitive overview of how the method is used to estimate benefits. Give at least 1 example of a specific application of each method. Describe at least one limitation or potential bias for each method.
2. True/False. The hedonic property value method can be used to estimate lost non-use value associated with oil pollution at remote, uninhabited locations. Explain.
3. In your reading, Cameron says that the value of a statistical life (VSL) should be "euthanized." Why does she think so? Explain what VSL is and what it is not. Does VSL provide an economic estimate of the value of a human life?
4. Identify two concerns with using marginal implicit prices from hedonic wage studies for calculations of VSL. The concerns should relate specifically to hedonic wage studies, not generally to VSL.
5. Economists consider revealed-preference methods to be more reliable than stated- preference methods for the valuation of environmental benefits, yet stated-preference methods are more frequently used. Explain both parts of this sentence.
6. In your reading, Kling et al. pose the question "is some number better than no num- ber?" What valuation method are they referring to, and what are the main concerns economists have about this method? Describe some of the types of biases that can arise when applying this approach. If the method is so controversial, why do we use it?
7. Years from now, you find yourself in graduate school (we all make mistakes). A friend says she has a clever way to estimate how much value people place on the risk of lead contamination of their drinking water. She is going to do so by measuring the amount that people spend on Brita filters and other filtration devices in different areas of the country with different levels of lead contamination risk. What method is your friend describing? Provide two possible criticisms of this strategy.
8. For the following cases, explain which method of environmental valuation (benefit estimation) you would recommend. Be sure to justify your choice of method, and describe briefly how the method works in the specific situation.
(a) Protection of a river in Idaho frequented by recreational fishermen (and fisher- women) from across the country.
(b) A proposal to clean up an abandoned hazardous waste site in a Boston neighbor- hood.
(c) An evaluation of the clean-up of an oil spill in a pristine, remote, unvisited coastal area.
(d) A plan to reduce toxic fumes affecting mortality risk of workers at an industrial facility.
(e) A policy aimed at reducing air pollution that affects visibility at the Grand Canyon.
(f) A policy designed to expand access to piped water so as to reduce the health risks from groundwater contamination by nearby shale gas wells.
9. The governor of a large state has proposed building a new 200 MW solar power plant, subsidized with state taxpayer money. In order to justify this outlay, his staff has put together a benefit-cost analysis. On the benefits side, they entered the avoided cost of building a 200MW coal-fired power plant, which would have been more expensive.
(a) Explain the error in the governor's logic.
(b) When alerted to this mistake, the governor replied that the benefit-cost analy- sis was unnecessary in any event, because two years earlier the legislature had approved a 200 MW wind farm that was even more expensive. Is this a valid justification that Kaldor-Hicks is satisfied?
Global Climate Change
1. Olmstead and Stavins say: "Given the global commons nature of the climate problem, a multinational-if not fully global-approach is required." Explain. In your answer, include a definition of "leakage."
2. What is the Kyoto Protocol? From your reading of Olmstead and Stavins, describe two weaknesses and two strengths of the Protocol. In what major ways does the 2015 Paris Climate Agreement depart from the Kyoto Protocol?
3. According to Olmstead and Stavins, what are the three key elements of an effective post-2012 international global climate policy architecture? Pick one element to describe in detail, and explain its importance as part of the policy architecture.
4. In his article on "Global Warming's Terrifying New Math," Bill McKibben summarizes the global warming situation with three numbers.
(a) Give the three numbers and explain briefly what each means.
(b) What does "divestment" mean, and why does Bill McKibben advocate this action?
Economic Growth and Sustainability
1. What is the Environmental Kuznets Curve (EKC), and what is the relationship that it posits? Draw an example curve, and be sure to label the axes. What factors could explain the curve's shape?
2. The "environmental Kuznets curve" shows the relationship between national pollutant emissions (for various countries) on the vertical axis, and GDP per capita on the horizontal axis. For nearly all pollutants, the curve exhibits an inverted-U shape, as explained in class, but the curve appears to be monotonically increasing (does not turn down) for carbon dioxide (CO2). Explain what you think could explain this difference.
3. The world's supply of oil is currently being depleted much faster than the rate of natural regeneration. Can this be efficient? Can it be sustainable?
4. People disagree about whether economic growth and sustainability are compatible. Part of the disagreement hinges on the appropriate definition of sustainability, and part hinges on differing assumptions about the economy. Explain. In your answer, be sure to include Nobel Laureate Robert Solow's definition of "sustainability" from an economist's perspective.