First exam
Fall 2003
Name: ________________
Time
collected:
________________
Time
returned (2 hours and 5 minutes later, or less): ________________
·
On the first page in your first blue book, please
write out the honor code and sign your name.
·
First read over the questions: if you are uncertain
about any question, please ask for clarification.
·
You can take up to 60 minutes per question. Please be sure that you don’t run out of time
with your second answer!
·
Please be specific when you cite and discuss the
articles that we have studied.
Good luck!
JTI
******
Section I – The theory of environmental policy
(ANSWER ONE QUESTION IN THIS SECTION – IA or IB)
A. Correcting for
externalities
In a large city with
many aspiring young musicians, an aspiring opera singer has the choice each day
(from 9:00 AM to 5:00 PM) between (a) singing in a municipal subway station
(where she is forbidden by law from collecting change from the subway riders)
or (b) teaching grade-school students, where she can earn $40 per hour.
A municipal worker
implements a survey of subway passengers, and estimates that, on average, each passenger receives approximately $0.50 of
benefit per hour from opera singing (because their utility is increased by the high-quality
music). The survey also shows that, on
average, 60 passengers pass through this subway station per hour when there
is no opera singing, and 90 passengers pass through this subway station per
hour when there is opera singing. The municipal government charges $1
per subway ride, which is its marginal cost per passenger.
1) What is the opportunity
cost (per hour) for the opera singer if she elects to sing in the subway
station? Justify your answer.
2) Describe the externality in
this situation. Is it public or private,
shiftable or non-shiftable, pecuniary or technological? Justify your answers.
3) In a graph with $$ on the
vertical axis and subway rides on the horizontal axis, illustrate two possible
equilibria in this market: (a) when there is no opera
singing; and (b) when there is opera singing. Without government intervention, which will
be the long-run equilibrium? Justify
your answer.
4)
If
the municipal government imposed a Pigouvian prescription in this situation, what
would it be, and how much should it be?
Would the Pigouvian prescription be pareto-improving? Justify your
answers.
5)
If
the municipal government imposed a Coasian prescription in this situation, what
would it be? Would the Coasian
prescription be pareto-improving? Justify
your answers.
6)
Would
your answers to any of the questions above (1 - 5) change if the opera singer
received a great deal of utility from signing in the subway? Justify your answers.
B. Solutions to the tragedy of the commons
You are one of 10 indigenous harvesters of a tropical forest. For every day that you and the other 9 people harvest in the forest, you each forego a wage of 100 pesos in the neighboring town.
Every day, you and each of the other harvesters can choose to harvest 1 tree, 2 trees, OR 3 trees. Your profit function can be expressed by the following table, where the first number in parentheses is your accounting profit (in pesos), and the second number is the accounting profit of each of the other 9 harvesters.
|
Revenues from tree harvesting |
|
||
|
|
|
|
|
|
|
Other 9 players harvest (in total) |
||
|
You harvest |
9 trees |
18 trees |
27 trees |
|
1 tree |
(300,300) |
(200,350) |
(100,200) |
|
2 trees |
(350,200) |
(250,250) |
(150,100) |
|
3 trees |
(200,100) |
(100,150) |
(50,50) |
Each of the other 10 harvesters
faces the same profit function
1) How many trees would be harvested if a single person owned the forest,
and she paid each harvester a wage of 100 pesos? Justify your answer.
2) According to Garret Hardin, how many trees would be harvested if this
were an open access forest? Justify your
answer.
3) According to Elinor Ostrom, how many trees would be harvested in the
presence of a central authority with complete information? Illustrate how such a solution would
lead to a pareto-improving outcome.
4) According to Elinor Ostrom, how many trees would be harvested in the
presence of a central authority with incomplete information? Illustrate how such a solution might not
lead to a pareto-improving outcome.
5) Following the analysis of Elinor Ostrom, explain how a ‘self-financed
contract enforcement’ could also lead to the pareto-optimal outcome. What is the most that each harvester
would be willing to pay to enforce such a ‘self-financed contract
enforcement’? Justify your answer.
6) Is the solution described in 1) – ownership by a single person –
superior to the solution described in 5) – the ‘self-financed contract
enforcement’? Justify your answer.
Section II – Environmental economics and
cost-effective policies
(ANSWER ONE QUESTION IN THIS SECTION – IIA or IIB)
A) Poverty, sustainability and natural resource
extraction
In
Slate last week, Nancy Palus reports (October
13, 2003);
Chad,
landlocked in the middle of Africa and one of the poorest countries on the
planet, joined Africa's group of oil producers Friday when African leaders,
World Bank officials, and hundreds of other invitees attended the formal
inauguration of the 650-mile pipeline from southern Chad to a port in
neighboring Cameroon. The World
Bank-backed project takes a novel approach, incorporating strict anti-corruption
measures to ensure that oil wealth be used not to enrich an elite few but to
improve the lives of average citizens.
The
Chad-Cameroon pipeline, at full production, is expected to pump about 225,000
barrels per day for shipment across the Atlantic. This oil is expected to bring
in more than $80 million per year to Chad, which currently ranks 165th
of 175 countries in the U.N. human development index and where corruption is
said to be rampant.
But
a coalition of environmental and aid organizations dubbed Friday a
"national day of mourning," arguing that widespread oppression and
insecurity in Chad will only be exacerbated by the oil project: “'Black gold'
in Africa, which represents 7 percent of the world's reserves, has more often left
a legacy of miserably low wages and living conditions for oil workers and their
families, of conflict and corruption, and no economic development."
This
legacy is what the World Bank wants to reverse with its innovative scheme to
place Chad's oil revenues under tight scrutiny, the bulk of the wealth going
toward the country's infrastructure. Specifically, Chad's oil revenues will be
put into an escrow account in London, "where the bank will take 5% to pay
back loans before the rest is earmarked for good works under the watchful eyes
of an independent monitoring panel." Under the World Bank plan, the money
for Chad is to be divided among an account for future generations (10 percent),
development of the Doba basin region that houses the main oilfields (5
percent), and national projects in health, education, roads, and water supply
(80 percent). Chad has established a
panel to ensure that funds are allocated according to these parameters, but
environmentalist activists have protested that the group is dominated by people
close to the Chadian president.
In ‘The Tragedy of the Commons’, Garret Hardin writes (p.
11):
The tragedy of the commons as a food basket is averted by private property, or something formally like it. But the air and waters surrounding us cannot be readily fenced, and so the tragedy of the commons [in the case of air and water] must be prevented by different means
In Governing the Commons, Elinor Ostrom writes (p.
13):
In regard to
non-stationary resources, such as water and fisheries, it is unclear what the
establishment of private rights means.
The ‘tragedy of the commons’ has proved particularly difficult to
counteract in the case of marine fishery resources where the establishment of
individual property rights is virtually out of the question. In regard to a fugitive resource, a diversity
of rights may be established giving individuals rights to use particular types
of equipment, to use the resource system at a particular time and place, or to
withdraw a particular quantity of resource units (if they can be found). But even when particular rights are unitized,
quantified and salable, the resource system is still likely to be owned in
common rather that individually. Common
ownership is the fundamental fact affecting almost every fishery regime.
Do
you agree with Hardin’s and Ostrom’s assessments here? Why or why not? Support your opinions
with relevant material from our reading, including but not restricted to
Hardin and Ostrom.