Tietenberg Tom, Lewis Lynne. Environmental & Natural Resource Economics

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development rights). For land conservation organizations buying only the enti-

tlements of interest is considerably cheaper than buying the land itself.

Therefore conservation groups could stretch a given budget over many more

pieces of land with conservation easements than by buying the land outright.

Donors may value some specific entitlements more than any market price they

could get for them (and hence want to retain them, an option afforded by con-

servation easements) but for other entitlements the market price (or the value of

the tax deduction) may be higher, making sale or donation the best option. An

owner of a forest, for example, may wish to continue to harvest wood from that

land, while being willing to donate the developments rights when he/she has

little or no interest in selling the forest to a developer anyway.

3. The simplest difference is that relative to an income tax, a property tax funding

would make land and the improvements on that land more expensive to own.

This, in turn, would raise the cost of all land-intensive activities such as forestry

or farming relative to activities requiring much less land. It might also cause all

firms engaging in land-intensive activities to consider if they could get away with

using less land. It might cause some residents, for example, to downsize to

smaller units.

4. Many answers, of course, are possible for this question, but here are a few

possibilities.

a. In this age group we could expect to have a smaller household size (as any chil-

dren are grown and gone), thereby lowering the need for housing space. We

might expect some of these households to downsize to smaller dwelling units.

b. We might expect some movement back into urban areas as the need for space

declines and difficulties with mobility arise.

c. Access to schools could become less important and access to medical facilities

more important.

d. In the face of diminishing human energy to do landscaping and maintenance,

condominiums could become relatively more attractive, since all their land-

scaping and maintenance is handled by the association in return for a

monthly fee. Since most condominium units are smaller than owners’ previ-

ous housing, this is also a way to downsize.

e. As health problems commonly rise with age assisted living facilities should

become more common and some retirees will move to be closer to their

children.

f. As older households are likely to be less constrained by either work or parenting

schedules they are freer to move to locales offering especially high-quality, age-

appropriate leisure-time activities.

g. Since household net worth is probably higher after a lifetime of earning, this

wealth might well also promote more seasonal second-home sales.

Notice that many of these hypotheses are testable by examining the appropriate

data. Are condos becoming a greater percent of the residential housing stock? Are

older households moving back into urban areas? Has second-home buying become

more prevalent? Sounds like a good research project.

611Answers to Self-Test Exercises

5. Because the ethanol subsidy raises the profitability of growing corn as a fuel, it

should: (1) increase the amount of domestic land allocated to agriculture (since

more per acre is now earned), (2) increase the amount of domestic agricultural

land allocated to fuel corn (since the net benefits per acre of that specific land

use have increased), and (3) lower the amount of domestic land allocated to

producing food crops as farmers, in response to these net benefit per acre

changes, allocate more land to fuel and less to food crops (most obviously, but

not only, corn).

6. Working at home reduces the amount of commuting and hence the cost of com-

muting. One implication is a lower incentive to locate close to work. If work-

places are densely located, working at home should make more remote locations

relatively more attractive. Hence, according to this effect, the density of develop-

ment might be expected to decline.

Chapter 11

1. Food stamp programs give the poor more money to spend on food, thus shifting

their demand curve for food to the right. Only if supply is perfectly inelastic

would this shift in demand increase prices without increasing quantity sold. On

the other hand, prices would normally rise somewhat unless the supply curve

was perfectly elastic. In general, the more elastic the supply curve, the larger

would be the increase in quantity sold and the smaller would be the increase in

prices for a given shift in demand.

2. Soil erosion diminishes future productivity, but its prevention requires current

outlays. If the renter has a long-term lease, and hence would be able to recoup

the investment, he or she might well take efforts to prevent soil erosion. If,

however, the renter has a short-term lease, he or she would not be likely to

spend the money to prevent soil erosion. The losses would accrue to the absen-

tee landlord, who would be less knowledgeable about the extent of the problem.

3. Export taxes will only be completely passed forward to the consumer if the

demand is perfectly inelastic. In that case they will simply pay the higher price

(including the tax). If it is less than perfectly elastic, however, demand for that

product will be reduced and the domestic producer will bear some of the burden

in the form of lower sales.

In world food markets it is unlikely that demand will be perfectly inelastic. Not

only can consumers choose to consume less as the price rises, but they can

switch to other suppliers or even to different food products.

4. A natural disaster, such as the 2010 drought in Russia, would shift the supply

curve to the left and raise prices. Consumers would be unambiguously worse off

as their net benefits would be reduced. Suppliers who lost their entire crop would

be unambiguously worse off, but the effects on other suppliers can actually be

positive. All of those suppliers (foreign suppliers, for example) whose crops were

completely unaffected would be better off as the higher prices for their crops

612 Answers to Self-Test Exercises

would raise their producer surplus. For suppliers that lost some, but not all of

their crops, it would depend on how the magnitude of the losses from the de-

stroyed crops compared to the magnitude of the gain from selling the remainder

at a higher price.

5. The United States tariff on imported sugar would raise the domestic cost of sugar

to domestic consumers, would cause a relative increase in their consumption of

domestically raised sugar and, it follows from that, a reduction in the amount of

sugar imported from abroad. The increased profitability of the domestic sugar

industry would allow it to compete for more land and other local resources. (To

follow up on a specific example of this phenomenon, examine the controversies

surrounding the effects of the Florida Sugar industry on the Everglades.)

Chapter 12

1. The plot being turned into a housing development would have the shortest

rotation period (youngest age) because the cost of delaying the harvest would be

greatest in this case. It would include an additional cost—the cost of delaying

the construction of the housing development—that would have to be factored

in, causing net benefits to be maximized at an earlier harvest age.

2. The cost trend is the result of two offsetting trends. Harvesting cost is a function

of the volume of wood, so it increases as the volume of wood increases. Since

these costs are discounted, however, costs further in the future are discounted

more. When the tree growth gets small enough, the discounting effect domi-

nates the growth effect and the present values of the costs decline.

3. A relative increase in the demand for forest-base biomass fuels would increase

the value of wood used for this purpose. To the extent that this added supply of

fuel holds household energy costs lower than they would otherwise have been,

consumers benefit, but they might lose if they use wood for other purposes

(as its price would be likely to rise). The producers of this fuel will benefit, but

producers of more traditional fuels would lose. Producers of products from

wood other than fuels (say paper mills using the wood for pulp) would lose as

their costs would rise. To the extent that this domestic biomass fuel substitutes

for imported fuel, the state can expect an income increase as the funds formerly

sent abroad are now spent locally where they have a higher multiplier effect.

4. The market would be expected to reach an efficient balance if the owner was

actively engaged in selling both recreation and harvested wood. In this case the

forest owner compares the marginal net benefits (reflected in their respective

revenue streams) of various combinations of harvesting and recreation and chooses

the combination that yields the highest net benefit. If, however, as is common, the

private owner sells only harvested wood, recreational uses would be undervalued.

5. Certification is especially effective when the benefits being protected by the cer-

tification process are directly received by the purchaser. It is less effective when

conveying benefits that do not directly affect the purchaser. Both certification

613Answers to Self-Test Exercises

systems convey a considerable amount of information that is about externalities.

For forests, for example, it can convey whether the wood is sustainably

harvested, but sustainably harvested wood is apparently indistinguishable from

unsustainably harvested wood in terms of its ability to be used to build a house,

construct furniture, etc. The real benefits are indirect and psychological—

knowing that the harvesting process is not degrading the environment. Organic-

produce certification produces many of those same indirect psychological

benefits, but in addition this form of certification conveys some information (the

absence of pesticide residues, for example) that directly can affect the consumer.

For this reason, organic-produce certification is probably a bit more likely to

produce a more efficient outcome all other things being equal.

6. A rise in the price of timber would make it more likely that harvested forests

would be replanted and would make land conversion to another use less likely.

Both of these reinforce components of sustainable forestry. On the other hand,

it would also make the rewards from illegal harvesting higher, which is incom-

patible with sustainable forestry. Hence the answer depends upon the likelihood

of illegal activity.

Chapter 13

1. a. The maximum sustainable yield is obtained when the marginal benefit of an

additional reduction in the population size is zero: 20P − 400 = 0 or P = 20,000

tons. The maximum sustainable yield can then be calculated using the g equa-

tion: g = 4(20) − 0.1(20)

= 40 tons.

b. The efficient sustained yield can be found by setting marginal cost equal to

marginal benefit: 20P − 400 − 2(160 − P); therefore, P = 32.7, which is a larger

population than the one that would produce the maximum sustainable yield.

2. a. No, despite the fact that this approach yields the efficient sustainable yield,

this is not an efficient solution. Net benefits would not be maximized because

costs would be too high. Everyone would have an incentive to capture as large

a share of the quota for him or herself as quickly as possible. This would lead

to excessively large boats and would not guarantee that the fishermen who

could catch the fish most cheaply would do the harvesting. The net benefits

would be smaller than possible.

b. Yes, this would be efficient. This quota system creates exclusive property

rights and, therefore, eliminates the need to catch as much as possible and as

soon as possible. Each fisherman can proceed on the most individually

appropriate schedule because his or her share of the catch is guaranteed.

Since the need to rush harvesting is eliminated, the need for excessively large

boats is also eliminated. Fishermen with high harvesting costs would find it

in their interest to sell their quotas to fishermen with low harvesting costs in

order to maximize their return from their quota. These transfers guarantee

that the fish are caught by those with the lowest harvesting costs, so net

benefits are maximized.

614 Answers to Self-Test Exercises

3. The increase in the license fee is represented as a parallel upward shift of the total

cost line, whereas the per-unit tax on effort is represented as a leftward rotation of

the total cost curve around the zero effort point. The latter increases the marginal

cost of fishing effort, while the former has no effect on the marginal cost.

In the private-property fishery, the license fee will have no effect on effort

(unless it is so high as to make fishing unprofitable, in which case the effort will

drop to zero), while the tax on effort will unambiguously reduce effort.

In the free-access fishery, both will reduce effort by exactly the same amount.

(Remember, in the free-access fishery the equilibrium occurs where total cost

equals total benefit. Since these two policy instruments raise the same revenue,

both affect total cost by the same amount.)

4. When trying to reduce the degree of inefficiency from an open-access fishery,

a regulation that increases the marginal cost of fishing effort by banning cer-

tain types of gear would be less efficient than a tax on effort. Although they

both rotate the total cost of effort upward, the tax imposes a transfer cost,

which is compatible with efficiency because it does not waste net benefits, and

the gear restriction is incompatible with efficiency because in this case the net

benefits are simply lost, not merely transferred.

5. a. In answering this question remember that the benefits are defined as price

times the quantity of fish harvested. A fall in the price of fish would be reflected

as a movement inward of that benefit curve.

In the typical economic model of an efficient fishery, a fall in the price

of fish would generally result in a smaller sustainable harvest. The effi-

cient level of effort is determined where MB = MC. A fall in the price of

fish lowers MB, but leaves MC unchanged. The only way to reestablish

MB = MC is by increasing MB by lowering effort, which, because the effi-

cient point is to the left of the maximum sustained yield, would lower the

sustainable harvest.

b. If the fishery allows free access, the effect is a bit more complex. Remember

for a free-access fishery the equilibrium level of effort occurs where TB = TC.

In this case, because the TB curve has shifted downward, the effort level is

reduced. That effect is the same as in (a). However, in this case because the

free-access equilibrium is normally to the right of the maximum sustained

yield effort level, lowering the effort level means a higher sustained harvest.

In essence, in this case, taking the pressure off the fish population allows that

population to experience more sustained growth, which means that more fish

can be caught with less effort.

6. a. This change is such that the after curve has a flatter slope, but a higher inter-

cept with the Y-axis. For the static efficient level of effort, where MB = MC,

the MC would have fallen. Reestablishing MB = MC would be accomplished

by expanding effort (thereby, lowering MB—remember MB is the tangent to

(or slope of) the TB curve) until it once again equaled MC. Increasing effort

on this side of maximum sustained yield point would necessarily increase the

size of the sustained harvest.

615Answers to Self-Test Exercises

b. In a free-access fishery since the total cost is lower after the change, effort

would expand. However, since this level of effort is to the right of the maxi-

mum sustained yield point, this increased effort would result in a smaller sus-

tained yield.

Chapter 14

1. a. In a cost-effective allocation of emissions reduction, the marginal control

costs should be equal. So $200q

= $100q

. Furthermore, the total reduction

is 21 units, so q

+ q

= 21. Solving the first of these equations for q

yields

− 0.5q

. Substituting this into the second yields 0.5q

+ q

= 21. Solving this

for q

results in q

= 14 and q

= 7.

b. From the text we know that in a cost-effective allocation with a single

receptor

Therefore,

Furthermore,

From the first equation it is clear that in a cost-effective allocation, q

= q

It remains to derive the total amount of control using the second equation:

2(20 − q

) + (20 − q

) = 27, so q

= 11 and q

= 11.

2. a. From the text we know T = MC

= MC

. From Problem 1(a) we know MC

=$1,400. Therefore T = $1,400.

b. Revenue = T(20 − q

) + T(20 − q

) = $1,400(13) + $1,400(6) = $26,600.

3. a. The control authority would auction off 16 allowances (30, which is the current

level of emissions, minus 14, which is the required reduction).

b. The market-clearing price would be $4.00. Since demand would equal supply

and marginal abatement costs would be equal for all firms, a $4.00 marginal

abatement cost produces the required 14 units of reduction.

c. With a $4.00 price Firm 1 would reduce emissions by 7 units so it would need

to buy 3 allowances. Firm 2 would reduce emissions by 4 units and hence

would need to buy 6 allowances and firm 3 would reduce 3 units of emissions

and therefore it would need to buy 7 allowances. Note that this produces the

required 14 units of reduction and accounts for the 16 allowances that were

made available by the control authority.

d. We know that that the cost-effective allocation is achieved when the MC

= MC

= $4.00. This allocation will be achieved with an emissions charge

if the firms set their MCs equal to $4.00. Hence the required tax rate is $4.00.

2(20 - q

) + (20 - q

) = 27.

(20 - q

) + a

(20 - q

) = 27

$200q

$100q

= MC

616 Answers to Self-Test Exercises

Chapter 15

1. a. There would be 12 permits issued, each worth 1 ppm. The price of the per-

mit will be that price that will clear the market; that is

We know that in equilibrium,

Further,

Solving this equation yields q

= 9 and q

= 20. So,

b. Permits auctioned off

First source = P(20 − q

= $4(20 − 20)1.5 = $0,

Second source = P(20 − q

= $4(20 − 8)1.0 = $48.

The six permits are worth $24, so the first source would sell all its permits

for a gain of $24. The second source would keep its initial allocation of six

permits and would buy six more at a cost of $24. The cost to the second

source exactly balances the gain to the first.

2. Imposing the same tax rate on every unit of emissions would normally be

expected to yield a cost-effective allocation of pollution-control responsibility if

the environmental target were specified in terms of aggregate emissions. In that

case, cost-effectiveness requires the marginal cost of emissions reduction to be

equalized across emitters and that can be achieved with a uniform tax rate.

A uniform tax rate would not, however, be compatible with a cost-effective

allocation of each control responsibility if the environmental target were an

ambient standard. In this case, you want the marginal costs of concentration

reduction (not emissions reduction) to be equalized across emitters. Since the

location of emissions matters in this case (not merely the amount of emissions),

a uniform tax rate will not be cost-effective.

3. Allowing the allowances to be traded after the allocation occurs is the process

that achieves cost-effectiveness so this allocation (and any others that allocated

the correct number of total allowances) would be compatible with cost-

effectiveness. Any cost-ineffectiveness remaining after the initial allocation

would be removed by the trading. However, if firms have advanced knowledge

P =

0.31202

1.5

0.5182

1.0

= $4 per ppm

1.5(20 - 2.5q

) + 1.0(20 - q

) = 12.

(20 - q

) + a

(20 - q

) = 12

0.3q

1.5

0.5q

1.0

or q

= 2.5q

= MC

= P.

617Answers to Self-Test Exercises

that more permits will be allocated to those with higher emissions, this creates

a cost-ineffective incentive to emit more during this interim period in order to

qualify for additional allowances once the system begins. Since these additional

emissions make the goal harder and more expensive to meet, costs are raised

above the minimum.

Chapter 16

1. The emissions charge equalizes marginal cost, a required condition for cost-

effectiveness. The subsidies induce utilities to choose options with a higher

marginal cost. By equalizing their after-subsidy marginal costs, utilities will min-

imize their outlays. This will not minimize total costs of control, since a greater

reliance on scrubbers will result than would be cost-effective.

2. High transfer costs in this context arise from a combination of high charges

and large amounts of uncontrolled emissions. This circumstance arises when

the marginal cost of control function rises steeply at relatively low levels of

control. Since the charge is equal to the marginal cost of control, high mar-

ginal control costs imply a high charge rate. Furthermore, if the function

rises steeply at relatively low levels of control, then there are large amounts of

emissions to which this high rate of charge is applied. Multiplying a high

charge times a large amount of uncontrolled emissions yields high transfer

costs.

3. Uncertain. Although in most circumstances this is true (since a tax would internalize

the external costs associated with the damages caused by greenhouse gases), it does

depend on the level of the tax. It is possible to set a tax rate so high as to force the

benefits from its imposition to be lower than the costs.

4. True. Regional systems control only emitters in their jurisdictions so unless all

possible regions have control systems in place some emitters will remain

uncontrolled. Leakage results from the flow of business from controlled enti-

ties to uncontrolled entities (because they can produce at lower cost and,

hence, charge lower prices.) This flow of business from controlled to uncon-

trolled emitters results in an increase in emissions that at least partially offsets

the reductions achieved within the region. A truly global system that included

all emitters in the same emissions trading system or facing the same green-

house gas emissions tax would exempt no one and hence eliminate the prob-

lem of leakage.

5. True. The marginal external cost rule is designed to harmonize private and

social incentives for global environmental problems. It does this by picking up

the extra cost (the marginal external cost) in developing counties associated

with choosing the globally optimal choice rather than the nationally optimal

choice. Without this rule many nations would find it in their national interest

to make choices that were inconsistent with the global objectives. With this

rule, at no extra expense to itself, a developing country can be a full partner in

the quest to achieve global goals.

618 Answers to Self-Test Exercises

Chapter 17

1. Taxes do have two advantages in achieving aggregate emissions reductions.

First, by lowering the cost per mile traveled fuel economy standards can encour-

age more miles traveled. Gasoline taxes increase the cost per mile traveled.

Second, fuel economy standards apply only to new vehicles while gasoline taxes

apply to the whole fleet of vehicles. Since new vehicles comprise only a small

proportion of the fleet, taxes will likely produce a quicker result.

Obviously, however, this advantage accrues to taxes only if implementing

them is politically feasible and the tax rates are high enough to produce the

desired change.

2. a. Labeling has the virtue that it seems to be politically feasible and it can

encourage a more fuel-efficient new vehicle fleet. However, it only affects

new cars and it has no affect on how many miles the cars are driven.

Furthermore, as we have noted in earlier chapters, labeling works best

when it affects attributes that directly affect consumers. Saving energy cer-

tainly directly affects consumers, but some of the benefits of this approach,

particularly those relating to national security and climate change, are

externalities and therefore probably not likely to be completely internalized

by prospective purchasers. These disadvantages would compromise its

effectiveness.

b. Older fuel-inefficient vehicles do typically disproportionately contribute

to the problem, and therefore they are a useful target of opportunity, but

they are still only part of the problem. By itself, this strategy does not

internalize the large number of other externalities associated with the

purchase of new automobiles or reducing emissions from the fleet of

automobiles that are not old enough to be affected by this program.

Furthermore, many of these older automobiles are owned by lower-

income households. Depending on how these vehicles are retired (not

compensating owners, for example), taking away their transportation could

impose a considerable burden on the poor (particularly the rural poor who

have no mass transit option).

c. Pay-as-you-drive insurance could probably be a useful complement because,

unlike the others, it forces on internalizing some of the externalities associ-

ated with miles driven. Thus it addresses a component that would not other-

wise be addressed.

3. a. From a social point of view, efficiency would require that the marginal pre-

mium per mile driven include all costs that are specifically related to miles

driven. These would include potential accident damage, contributions to

climate change (greenhouse gas emissions), and national security damages

(stemming from import dependence).

b. A private company would be concerned about recovering the costs related

to the claims it will have to pay out—accident damages, not the others.

Internalizing the other damages would require the participation of the

government.

619Answers to Self-Test Exercises

620 Answers to Self-Test Exercises

Chapter 18

1. a. The price would be $1,400. In the final allocation, the first source would

control 7 units and would hold 13 permits, whereas the second source would

control 14 units and hold 6 permits. The first source would have to purchase

4 permits—the 13 it needs to minimize cost minus the 9 it was initially

given—at a total cost of $5,600. The second source would sell 4 permits,

thereby moving from the 10 held initially to the 6 it needs to minimize costs,

so it would gain $5,600 from the sale.

b. We know that in the final equilibrium, the marginal control cost will be equal.

Since for the third source the marginal control cost is constant at $1,600, this

will determine the final marginal control cost. The final permit price will be

$1,600. The control allocation can be found for the first and second sources by

choosing the level of control that yields a marginal control cost equal to $1,600.

Thus $1,600 = $200q

, so q

= 8 and $1,600 = $100q

, so q

= 16.

The third source will have to clean up sufficient additional emissions to

meet the target. Uncontrolled emissions were stated to be equal to 50. The

first two sources would clean up 24 units, leaving 26 units uncontrolled.

Since the target emissions level is stated as 19 units, the third source would

have to clean up the remaining 7 units (q

= 7). The third source would have

to purchase three permits since it received no initial allocation. Two would

be purchased from the second source, and one would be purchased from

the first.

2. a. With these constant marginal cost functions, cost-effectiveness is achieved by

securing as much reduction as possible from the facility or facilitates with the

lowest marginal cost. In this case, that means securing the first 10 units of

reduction from the first facility and the next 5 from the second facility.

b. The total variable cost in this case is simply the sum of the marginal costs for

each unit of reduction. Therefore, the cost from reducing at the first facility

would be $30 (10 units × $3) and the cost of the reductions at the second unit

would be $20 (5 units × $4) so the total variable cost would be $50.

c. The total variable cost if all 3 facilities were forced to reduce 5 units would be $15

(5units × $3) + $20 (5 units × $4) + $25 (5 units × $5) = $60. The extra $10 over the

cost-effective allocation results from the fact that this allocation of responsibility

substitutes 5 units at $5 for the 5 units at $3. The extra $20 per unit reduced

accounts for the additional $10.

Chapter 19

1. No. A potential toxic substance injurer facing an efficient negligent standard will

minimize its cost by taking the efficient level of precaution and meeting that

standard; he/she will therefore typically not be found negligent. Knowing that

the best private solution for the potential injurer is to avoid being negligent,

potential victims have an incentive to take whatever precaution they can do to

minimize their damages.

Tietenberg Tom, Lewis Lynne. Environmental &amp; Natural Resource Economics

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Tietenberg Tom, Lewis Lynne. Environmental & Natural Resource Economics