Change in the value of amenities can be either positive or negative.

It is typically negative due to damage done to natural environments

by pollution and degradation. Performance Bonds: Advantages - Provide incentive to ensure environmental preservation or clean-up,
Explicit pricing of environmental quality, Incentive to research the amount of damage that can be done (to determine the appropriate size
of the bond), Flexibility: bond could be changed to reflect new information. Disadvantages - Incentive for regulator to confiscate the
bond even if the site is cleaned up, Liquidity constraints: bonds are often quite large, Results in infrequent use of bonds, perhaps due to
risk of default, Could be a barrier to entry into an industry, Insurance markets do not handle these risks well, Imperfect enforcement: A
polluter could argue that damage was not their fault, so they need not surrender the bond, Government may choose to not enforce the
bond. Which of the four components of capital are most likely to be affected by global climate change? Do you think that all of them are
affected? Explain in two or three paragraphs. lobal climate change is expected to have a significant impact on various components of
capital, including natural, human, social, and physical capital. Among these, natural capital is most likely to be affected by climate
change, as it involves the earth's natural resources and ecosystems that support human life and economic activity. The physical impacts
of climate change, such as rising sea levels, more frequent and severe weather events, and changing precipitation patterns, are expected
to have profound effects on ecosystems, biodiversity, and the provision of ecosystem services that support economic activity.
(paragraph)The impacts of climate change on natural capital can also have implications for other components of capital, such as human
and social capital. For instance, changes in weather patterns can affect food production, water availability, and disease transmission,
which can have significant impacts on human health and well-being. Social capital, including social networks, institutions, and
governance structures, can play a critical role in responding to these impacts and building resilience to climate change. In conclusion, all
four components of capital are likely to be affected by global climate change. While natural capital is most directly impacted by physical
changes in the environment, these impacts can have significant implications for other components of capital, including human, social,
and physical capital. As such, it is critical that policymakers and stakeholders consider the interconnectedness of these components and
work to build resilience to the impacts of climate change across all sectors of the economy. (false)The Environmental Kuznets Curve is
the same shape for all pollutants. It has the hump shape for particulates, but not for solid waste. (false)When countries spend all their
resource revenues on current consumption, they are following the Hartwick Rule. For sustainable development for countries that depend
on non-renewable natural resources: consumption can be maintained if rents from non-renewable resources are continuously invested
rather than used for consumption. (false)A Nash equilibrium international agreement is always one that maximizes the total payoff for
everyone. It is more like a Prisoners’ Dilemma. Nash equilibrium involves individual optimization externalities. (false)The benefit
transfer method is just a fancy way to say that the benefit per unit of an environmental amenity as measured in one place is used as a
measure of that benefit in another place. The benefit transfer method involves using the estimated value of an environmental amenity
from one location to estimate the value of the same amenity in another location where no direct valuation data is available. This method
assumes that the value of the amenity is transferable between locations. Therefore, it can be considered a way of using a benefit per unit
of an environmental amenity as measured in one place as a measure of that benefit in another place. (false) Economists agree that the
market interest rate is the correct choice for a social discount rate, and it should be used in every benefit-cost analysis. Economists do not
universally agree on the choice of a social discount rate to use in benefit-cost analysis. The social discount rate represents the rate at
which future benefits and costs are discounted to their present values. The market interest rate is one option, but other rates such as the
pure rate of time preference and the social opportunity cost of capital are also used. The choice of a discount rate depends on the specific
context of the analysis and the values and preferences of the decision-makers. (false) Maximizing expected value is the same as
maximizing expected utility. Maximizing expected value and maximizing expected utility are not the same thing. Expected value is the
weighted average of the possible outcomes of a decision, where the weights are the probabilities of each outcome occurring. Maximizing
expected value means choosing the decision that has the highest expected value. (true) Property rights based policies can lead to the same
number of emissions regardless of who holds the initial property rights. Gains from trade are maximized at MAC=MD, regardless of the
initial allocation. (false) Payments for ecological services are a kind of emissions tax. Green service costs and emissions taxes are two
separate and distinct policy areas. Environmental service levies involve paying landowners or communities for the environmental
benefits that their land provides, while emissions taxes are a pollution tax that incentivizes polluters to reduce their emissions. While
both policies aim to reduce environmental damage, they work in different ways and target different actors. (false) If a government issues
the wrong number of emissions permits, it has no way of identifying the mistake and no way to correct it. If the government issues the
wrong number of carbon credits, they can identify and correct the error. For instance, if the government issues too many permits, the
price of the permit goes down, making it cheaper for companies to emit more pollutants. The government could then reduce the number
of permits in subsequent years to correct the error. Likewise, if too few permits are issued, the price of the permits would increase, and
the government could increase the number of permits to correct the error. Green GDP = usual GDP – Depreciation in non-renewable
resources - Depreciation in renewable resources + Change in the value of other environmental amenities. Identify and briefly explain
three things that could go wrong if you tried to measure students’ willingness to pay for a reduction in CO2 emissions. There are a few
potential issues that could arise if you tried to measure students' willingness to pay for a reduction in CO2 emissions using a single email
survey question. Here are three possible problems: Lack of context: The question is very general and doesn't provide any context for the
respondent to base their answer on. Without knowing more about how the reduction in CO2 emissions would be achieved, what the
current level of emissions is, or what the impact of the reduction would be, it's difficult for respondents to interpret and answer the
question how you might want them to. Sampling bias: Since the survey is being sent out via email, it's likely that only a certain subset of
the student population will respond. This could lead to sampling bias, where the respondents are not representative of the overall student
population. Comfortability: Respondents may not feel comfortable providing answers that present themselves in an unfavorable manner.
Would legal liability for damages work well in the context of CO2 emissions? Why or why not? Legal liability for damages related to
CO2 emissions is a complex issue. On one hand, it could potentially be an effective way to hold polluters accountable for the
environmental harm they cause and provide a financial incentive to reduce emissions. However, there are several challenges to
implementing such a system. Firstly, determining liability for damages related to CO2 emissions is difficult as emissions are often the
result of multiple actors and factors, making it challenging to identify a single party responsible for the harm caused. Additionally, the
impact of emissions can be widespread and long-term, making it challenging to quantify and assign a monetary value to the harm caused.
Moreover, legal liability for damages may not be effective in driving down emissions as it can take time for legal action to take place and
for damages to be compensated. It may also be difficult to enforce legal liability on large multinational corporations that operate across
multiple jurisdictions. Overall, while legal liability for damages related to CO2 emissions has the potential to be effective, it would
require a well-designed system that addresses the complex issues surrounding emissions and liability. Other measures such as emissions
regulations, carbon pricing, and investment in renewable energy may also be necessary to effectively address climate change. (true)
Pollution taxes give polluters an incentive to find new abatement technologies, while subsidies do not. True If the abatement subsidies
are tied to existing technologies, but some subsidies are precisely aimed at new technologies so it would also be false. Or dales for the
reasons of cost saving “silvers” from class. (false) Cap-and-trade systems always lead to a cost-effective allocation of pollution, even
when combined with other policies. False if combined with taxes applied in some submarkets but not others, or if applied in electricity
markets that feature cost-based pricing. This results in unequal MAC across pollution. (true) Pollution taxes lead to a cost-effective
allocation of pollution. If everyone faces the same tax tate. Everyone puts MAC=1, so they all end up with the same MAC. If a
government wanted to impose a tax on solid waste (garbage) emissions, how might it do so? Do you think it would be possible to
implement a cap-and-trade system for this kind of pollution? Perhaps make people buy special garbage bags or install weighing
machines on collection tracks. Allow people to buy and sell the special garbage bags? Give everyone a weight-of-trash allowance and let
people trade those allowances. Do not collect at a property that has run out of allowances? Perhaps a not-so-good idea. (false) Because
club goods are non-rival, it is impossible to prevent someone from using them. Club goods are non-rival, meaning that one person's
consumption of the good does not reduce the amount of the good available for others to consume. However, it is possible to prevent
someone from using a club good by charging a fee for access, such as a membership fee for a gym or a subscription fee for a streaming
service. (true) Adverse selection is possible in the market for organic produce. Adverse selection is a market failure that can occur when
buyers have better information about the quality of a good than sellers. This can lead to a situation where sellers are unable to charge a
fair price for their goods, as the buyers who are most willing to pay are those who expect the goods to be of lower quality. In the market
for organic produce, adverse selection is possible because it can be difficult to verify the true organic status of a product. (true) It is
possible to have the right to use an asset without also having the right to sell that asset. The right to use an asset and the right to sell an
asset are two separate things. For example, someone may have the right to use a car, but not have the right to sell the car. This can occur
in a lease agreement, where the lessee has the right to use the car but not the right to sell it . In what sense is global climate change the
result of externalities? In what sense are actions to reduce global climate change public goods? Externality: effects on other people who
are not part of the market transaction. When someone uses electricity, people elsewhere on the globe are not part of the contract. Public
goods: non-rival? Yes, they affect everyone. Non-excludable? Yes, it is impossible to prevent someone from “using” the climate.
Consider a world with two countries, Hogland (H), and Farmia (F). Each country emits methane, and damages depend on the total
amount emitted by the two counties. The marginal damage function is given by MDH=EH+EF, MDF=EH+EF. Each country has
abatement costs that depend on only its own level of emissions. The marginal abatement cost curves are given by MACH =80−EH and
MACF =80−EF. (a) Suppose that the two countries cooperate to decide on an optimal level of emissions. i. Show that EH = EF at any
cost-effective allocation of emissions. At any cost-effective allocation of emissions, the marginal abatement cost for both countries
should be equal. Thus, MACH = MACF, which gives 80−EH = 80−EF. Solving for EH and EF, we get EH = EF. ii. Show that the
aggregate (social) marginal damage function is given by SMD=2(EH +EF). The total marginal damage function is the sum of the
marginal damage functions for each country, so SMD = MDH + MDF = EH + EF + EH + EF = 2(EH + EF). iii. Find the efficient level
of total emissions. To find the efficient level of total emissions, we need to minimize the social marginal damage function subject to the
constraint that EH = EF. Therefore, we must minimize SMD = 2(EH + EF) subject to EH = EF. Solving this optimization problem gives
us EH = EF = 16. Therefore, the efficient level of total emissions is 2*16 = 32. (b) Suppose, now, that the countries behave non-
cooperatively. Initially, each country selects its own level of emissions, by setting MACi = MDi (i = HF) and taking what the other does
as given. i. Show that the countries’ decisions can be described by EH =40−1/2EF and EF =40−1/2EH. For country H, MDH+MACH.
EH+EF=80-15H. 2EH=80-EF. EH=40-1/2EF. Likewise for F, MDF+MACF. EH+EF=80-EF. 2EF=80-EH. EF=40-1/2EH ii. Find the
Nash equilibrium level of emissions in each country. EH =40-1/2EF. EF=40-1/2EH. Substituting the 1st of these into the 2nd given:
EF=40-1/2(40-1/2EF). EF=40-20+1/4EF. EF-1/4EF=20. 3/4EF=20. EF=80/3. Then EH=40-1/2EF=40-1/2 80/3=120/3 -40/3=26.67(c)
Provide an intuitive explanation of why total emissions are higher in part (b) than in part (a). When the countries cooperate, they can
reach the efficient level of emissions by allocating emissions equally between them. However, when they behave non-cooperatively, each
country tries to maximize its own welfare, given the emissions of the other country. This leads to a situation where both countries emit
more than the efficient level of emissions, resulting in higher total emissions. In this case, each country tries to free-ride on the emissions
reduction efforts of the other country, leading to a suboptimal outcome. Suppose that and environmental amenity increases demand for a
particular good. Specifically, the demand can be described by the following equations. Q0 = 300 − 4P, demand without the amenity Q1 =
400 − 2P, demand with the amenity. The supply (marginal cost) curve is given by QS = 2P. (a) Compute the equilibrium price and
quantity both without and with the amenity. With: Qs=Qd. 2P=300-4P. 6P=300. P=50. Qs=2(50) =100. Qd=300-4(50) =100. With:
Qs=Qd. 2P=400-2P. 4P=400. P=100. Gs=2(100) =200. Qd=400-2(100) =200. (b) Compute the increase in market surplus due to the
increased level of the environmental amenity. Without: surplus=1/2(100)75=3750. With: ½*200(200) =20,000. Increase in
surplus=20,000-3750=16,250. (c) What would happen if someone tried to do a hedonic pricing study in this market? [Hint: compare the
price change to the amount of the shift in demand. Hedonic pricing estimate=Q-change in P=150(50) =7,500. This is an underestimate of
the benefit. This is because the elastic supply curve creates a situation in which the price increase is muted relative to the increase in
demand. Suppose that there is uncertainty about the benefits of a project. There is a 30% chance that it will be worth $90,000, and a 70%
chance that it will be worth $160,000. The decision maker has the utility function U(B) = B. (a) Find the expected value of the benefits
and the certainty-equivalent benefit of this project. EV=0.3(90,000) +0.7(160,000) =139,000. EU=0.3*sqrt 90,000+0.7 sqrt
160,000=370. BCE satisfies U(BCE)=EU. Sqrt BCE=370. BCE=3702. BCE=136,900. (b) Use your answer in part (a) to explain why the
decision maker is risk averse. The decision maker is risk averse because CE<EV. (c) Suppose that the project will cost $137,500 to carry
out, and that this is known for sure. Will this decision maker find that this project is worth carrying out? Explain. 137,500>136,900.
Cost>right-adjusted benefit. Thus, the project is not worth carrying out. (d) Would your answer in part (c) change if the decision maker
were risk neutral? Explain. For a person who is risk neutral, the decision is based on expected benefit. 137,500>136,900. Cost<EV.
Hence, project is not worth taking.