Environmental Economics and Management Theory Policy and Applications 6th Edition Callan Test Bank

Environmental Economics and
Management Theory Policy and

Applications 6th Edition Callan Test
Bank
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CHAPTER 7
Assessing Benefits for Environmental Decision Making
TRUE-FALSE
1. The change in health, ecological, and property damages linked to environmental policy
is known as incremental benefits.
Answer: T
2. An indirect gain to society attributable to environmental policy implementation is referred

to as a primary environmental benefit.
Answer: F
3. Increased fish populations linked to water pollution policy would be a type of secondary
environmental benefit.
Answer: F
4. In theory, the concept of incremental benefits refers to the change in MSB of

environmental quality from a pre-policy level to a post-policy level.
Answer: F
5. If the MSB function for some measure of environmental quality were known, the change
in TSB associated with a policy initiative could be measured by the area under the MSB
between the pre- and post-abatement levels.
Answer: T
6. The benefit received from using or accessing an environmental good is known as user
value.
Answer: T
7. If an individual receives utility from enjoying the view of a mountain range, that mountain
range is said to provide indirect user value to the individual.
Answer: T
8. If an individual enjoys swimming in the ocean, the ocean generates existence value to
the individual.
Answer: F
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9. Stewardship refers to a sense of obligation to future generations to preserve the
environment.
Answer: T
10. The approach that estimates benefits according to a technical relationship between a
resource and a user of the resource is called the behavioral linkage approach.
Answer: F
11. When using a damage function, incremental benefits are measured as a vertical
distance of total damages (TD) associated with a decrease in some contaminant (C).
Answer: T
12. The averting expenditure approach is favored by researchers because it can capture
both existence and user value.
Answer: F
13. The contingent valuation method is so called because it is contingent upon the
hypothetical market that serves as the context for the survey.
Answer: T
14. The benefit estimation method that relies on goods that are complements to
environmental quality is the averting expenditure method.
Answer: F
15. A known problem associated with the averting expenditure method is jointness of
production, which refers to goods that provide services beyond those that improve the
environment.
Answer: T
16. The travel cost method estimates benefits based on the substitutability of a natural
resource and its recreational value.
Answer: F
17. A disadvantage of the travel cost method is that it estimates only existence value and
not user value.
Answer: F
18. In modeling the travel cost method, the estimated benefit of improving the environmental
quality of a natural resource is captured by the change in consumer surplus associated
with a decrease in demand for that resource
Answer: F
19. The hedonic price method is based upon the premise that goods and services are
valued for their individual attributes.
Answer: T
20. Among the advantages of the hedonic price method is that data on a product’s
characteristics are readily available.
Answer: F
MULTIPLE CHOICE
1. Incremental benefits refer to the

a. accumulated gains linked to environmental policy
b. total social benefits of avoiding ecological damage
c. reduction in environmental damages associated with an environmental policy initiative
d. none of the above
Answer: c.
2. Assuming that the marginal social benefit (MSB) of environmental quality is known, then
a. the MSB represents the demand for environmental quality
b. total social benefits (TSB) of abatement, A1, can be captured as an area under the MSB
up to A1
c. incremental benefits are measured as an area under the MSB between the pre- and
post-policy abatement levels
d. all of the above
e. none of the above
Answer: d.
3. If benefit functions for a public good could be identified accurately, incremental benefits
would be measured as
a. the area under the MSB function between the pre- and post-policy abatement levels.
b. the area under the TSB function between the pre- and post-policy abatement levels.
c. a horizontal distance on the MSB model corresponding to the pre- and post-policy
abatement levels
d. none of the above
Answer: a.
4. The benefit received from the continuance of an environmental good is called

a. user value c. existence value
b. stewardship d. vicarious consumption
Answer: c.
5. Vicarious consumption refers to the notion that

a. individuals have a sense of obligation to preserve the environment for future generations
b. people gain utility knowing that others receive gains from an environmental good
c. individuals gain from directly consuming the services generated by an environmental
resource
d. natural resources have intrinsic value
e. none of the above
Answer: b.
6. The utility a consumer derives from knowing that others receive benefit from an
environmental good is called
a. stewardship value c. direct user value
b. indirect user value d. vicarious consumption
Answer: d.
7. The damage function method

a. is a behavioral linkage approach to measuring environmental benefits
b. uses a technical relationship between an environmental resource and a user of that
resource to estimate benefits
c. uses the same technique as the contingent valuation approach
d. is capable of measuring all aspects of incremental benefits simultaneously
Answer: b.
8. When researchers use the damage function method, they

a. model the relationship between the cost of the policy and the associated reduction in
environmental damages
b. can directly measure the reduction in environmental damage in monetary units
c. measure the link between a policy-induced decrease in contamination and the
associated reduction in environmental damage
d. can measure all aspects of incremental benefits at once
Answer: c.
9. The benefit estimation method that uses surveys about hypothetical market conditions is
a. the averting expenditure method c. the travel cost approach
b. the contingent valuation method d. the political referendum approach
Answer: b.
10. The contingent valuation method involves

a. constructing a hypothetical market
b. designing a valid survey instrument to gather WTP data
c. evaluating the truthfulness of responses
d. all of the above
e. (a) and (c) only
Answer: d.
11. The averting expenditures method

a. uses spending changes on goods that act as substitutes for environmental quality
b. defines personal environmental quality as the relevant market
c. has the disadvantage of jointness of production, which biases the benefit estimate
d. all of the above
Answer: d.
12. In the averting expenditures model shown below, if environmental quality is E1, and
personal environmental quality is X1, the area or distance that represents the individual’s
averting expenditures is
MC1 based on overall environmental quality E1
$ a
g
f MC2 based on overall environmental quality E2
b
h
c
k
d
MB
e
X1 X2 Personal environmental quality (X)
a. edfX1 b. edhX2 c. dgh d. edfhX2
Answer: a.
13. Installing an air purifier or a water filtration system is an example of a(n)

a. direct estimation method
b. ozone-reducing policy
c. physical linkage approach
d. averting action
Answer: d.
14. In the graph shown below, assume policy changed overall environmental quality from E1
to E2. Based on this information, the area or distance that represents an estimate of
incremental benefits to achieve personal environmental quality of X2, according to the
averting expenditure method (AEM), is
MC1 based on overall environmental quality E1
$
a
g
f MC2 based on overall environmental quality E2
b h
c
k
d MB
e
X1 X2 Personal environmental quality (X)
a. edfhX2 b. edhX2 c. dfh d. none of the above
Answer: c.
A collaborative federal and state program has been proposed in response to acid rain damage
in Newport Bay, Maryland. To estimate the incremental benefits of the program, you use the
travel cost method based upon the following pre- and post-policy recreational demand functions:
Pre-policy: P = 62 – 0.02V1 Post-policy: P = 80 – 0.02V2,
where V is the number of visitors (in thousands) and P is the admission fee. Assume the
admission fee is set at $20 per visitor. Use this information for any or all of Questions 15
through 17.
15. The number of pre- and post-policy visitors, V1 and V2, (in thousands) is ____ and
_____, respectively.
a. 2,100; 3000 c. 61.6; 79.6

b, 44,100; 90,000 d. none of the above
Answer: a.
16. Before the policy was put into effect, estimated consumer surplus (in thousands of
dollars) was valued at
a. 2,100 b. 44,100 c. 90,000 d. 45,900
Answer: b.
17. The estimated incremental benefits (in thousands of dollars) associated with this new
policy are
a. 2,100 b. 44,100 c. 90,000 d. 45,900
Answer: d.
18. A disadvantage of the travel cost method is

a. it cannot determine monetary values
b. it estimates only user value and not existence value
c. it focuses on recreational use making it ineffective for commercial use
d. all of the above
e. (b) and (c) only
Answer: e.
19. The hedonic price method

a. is a direct method of estimating benefit
b. relies on the theory that goods are valued for their attributes
c. is a physical linkage approach
d. is useful but not intuitive
Answer: b.
20. In practice, the hedonic price method
a. is easy to use because attribute data are always readily available
b. estimates the prices of the product’s characteristics
c. can be implemented with a simple empirical model
d. has never been used by empirical economists
Answer: b.
SHORT PROBLEMS
1. There is some debate about whether secondary benefits should be considered when
assessing public policy proposals. Identify two reasons why secondary benefits might be
excluded from a benefit-cost analysis of proposed environmental policy.
Solution
1. Among the possible reasons are:
• From a practical perspective, data for some secondary benefits, such as

increased worker productivity, may be unavailable, incomplete, or difficult to
measure, any of which can cause bias.
• Some secondary benefits may be difficult to attribute solely to environmental
policy, such as increased demand for labor inputs to carry out that policy.
• Indirect gains in one market can be offset as losses in another, which means that
excluding them might be justifiable.
(For more information, see Haveman and Weisbrod (1975).)
2. Suppose that the Marginal Social Benefit associated with drinking water quality is
estimated to be MSB = 100 – 0.5A, where A is the percentage of mercury abated from
drinking water and MSB is measured in millions of dollars. Find the total social benefit
(TSB) associated with a federal policy that increases mercury abatement from 20
percent to 30 percent.
Solution
2. The TSB associated with some abatement level can be found as the area under the
MSB function at that level. Therefore, to find the change in TSB associated with the
increased mercury abatement from 20 percent to 30 percent, find the TSB at each
abatement (A) level, and then find the difference between the two. Graphically, this
difference is shown as the shaded area under the MSB curve between the 20 percent
and 30 percent abatement levels, as shown in the accompanying figure.
MSB
($ 100
millions)
90
85
MSB
0 20 30 A (% mercury abatement)
To calculate the shaded area, begin by finding the MSB at each A, i.e., when A = 20,
MSB = 100 – 0.5(A) = $90 million, and when A = 30, MSB = 100 – 0.5(30) = $85 million.
Now, find the area as (½ * 10 * 5) + (10 + 85) = $875 million.
Alternatively, find the area under MSB when A = 30, which is $2,775 million, and
subtract the area under MSB when A = 20, which is $1,900 million, for a difference of
$875 million.
CASE STUDY
CASE 7.1: INCREMENTAL BENEFIT ESTIMATION IN AIR QUALITY STANDARD SETTING
In 1983, the EPA prepared a Regulatory Impact Analysis (RIA) for a proposal to tighten the air
quality standard for particulate matter. Particulate matter (PM) refers to a broad class of
contaminants that are emitted into the air as small particles. As part of the requirements of the
RIA, the EPA had to estimate the incremental benefits of this proposal.
Relying on the findings of scientific studies, the EPA determined that exposure to PM is linked to
such health problems as respiratory and cardiovascular disease. The agency further found that
the associated welfare effects include: soiling of buildings and materials; increased acidic
deposition through releases of sulfate particles; and visibility impairment. Using this qualitative
assessment as a basis, the EPA had to estimate how much these damages would be reduced
by the proposed change in the PM standard and then monetize its findings.
The data below presents the series of benefit estimates actually used in the EPA's evaluation.
For each benefit class, the letters A through F indicate the various procedures used to derive
the estimates.
INCREMENTAL BENEFIT ESTIMATES

By Aggregation Procedure
(billions of 1980 dollars)
A B C D E F
BENEFIT CLASS
Mortality 1.12 1.12 1.12 12.72 12.72 13.84
Acute morbidity 0.00 1.32 10.65 10.65 10.65 11.97
Chronic morbidity 0.12 0.12 0.12 0.12 11.40 11.40
Soiling and materials (household sector) 0.00 0.00 0.73 0.73 3.14 13.85
Soiling and materials (manufacturing sector) 0.00 0.00 0.00 0.00 1.30 1.30
TOTAL incremental benefits 1.24 2.56 12.63 24.24 39.22 52.36

(Note: Some totals may not agree due to independent rounding.)
1. Assess the 6 approaches, and identify some of the reasons why the estimates of total
incremental benefits vary so widely.
2. Why might the specific estimate for mortality be so much higher for Approach F ($13.84
billion) but only $1.12 billion under Approaches A, B, and C?
Sources: U.S. EPA, Office of Policy, Planning, and Evaluation (August 1987); Mathtech, Inc.
(March 1983), pp. 1-52.

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Environmental Economics and

Management Theory Policy and

2. An indirect gain to society attributable to environmental policy implementation is referred

4. In theory, the concept of incremental benefits refers to the change in MSB of

1. Incremental benefits refer to the

4. The benefit received from the continuance of an environmental good is called

5. Vicarious consumption refers to the notion that

7. The damage function method

8. When researchers use the damage function method, they

10. The contingent valuation method involves

11. The averting expenditures method

a. edfX1 b. edhX2 c. dgh d. edfhX2

13. Installing an air purifier or a water filtration system is an example of a(n)

a. edfhX2 b. edhX2 c. dfh d. none of the above

Pre-policy: P = 62 – 0.02V1 Post-policy: P = 80 – 0.02V2,

a. 2,100; 3000 c. 61.6; 79.6

a. 2,100 b. 44,100 c. 90,000 d. 45,900

18. A disadvantage of the travel cost method is

19. The hedonic price method

1. Among the possible reasons are:

• From a practical perspective, data for some secondary benefits, such as

(For more information, see Haveman and Weisbrod (1975).)

CASE 7.1: INCREMENTAL BENEFIT ESTIMATION IN AIR QUALITY STANDARD SETTING

INCREMENTAL BENEFIT ESTIMATES

TOTAL incremental benefits 1.24 2.56 12.63 24.24 39.22 52.36

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