Discussion Questions Chapter 2 1. Explain why it would not be desirable (from the point of view of economic efficiency) to eliminate all emissions of sulfur dioxide from electric power plants. Now suggest a setting in which zero pollution might be efficient. 2. In figure 2.3, abating XMAX units of pollution would result in total benefits of pollution abatement greater than the total costs. Is this amount of pollution abatement efficient? Why or why not? Refer to both figure 2.3 and figure 2.7 in your answer. 3. Consider the case of Aracruz Celulose, S.A., the paper pulp manu- facturer described in this chapter. Suppose a study finds that the marginal benefit of reducing chlorinated organic compounds in the effluent from pulp mills is $0.50 per kilogram ofAO X. (For sim- plicity, assume that this number does not change with the amount of pollution.) Which pulping technology would be efficient in this case? What would be the resulting annual costs and benefits associ- ated with pollution abatement? 4. Explain the typical shapes of the total abatement cost and benefit curves, as well as the marginal benefit and cost curves. 5. Imagine a policy to reduce emissions of greenhouse gases that would yield a marginal net benefit, in present value, equal to $1 million today and $2 million next year. Would this policy be dynamically efficient? Why or why not? 6. Advocates for wilderness protection have often criticized the com- mon practice of setting aside “rock and ice” (i.e., alpine areas) as protected land, while more productive bottomland areas (along Nathaniel O. Keohane and Sheila M. Olmstead, Markets and the Environment, 259 DOI 10.5822/ 978-1-61091-608-0, © 2016 Nathaniel O. Keohane and Sheila M. Olmstead. 260 discussion questions river valleys, for example) are typically left in agriculture or other intensive use. In general, the bottomland areas would also provide richer species habitat than the alpine areas. What are the likely pros and cons of this approach from the perspective of economic efficiency? Chapter 3 1. How might we estimate the marginal benefits of preservation of the California condor, the endangered species discussed in chapter 2? Imagine that we estimate the marginal benefits of condor pres- ervation to be $200 per bird. Are there policy measures that would be excluded if we applied the equimarginal principle to condor preservation? Explain. 2. The economic benefits of an environmental policy such as the re- duction of sulfur dioxide emissions from power plants are measured by the collective willingness to pay of human beings. Policies like this may have ecological benefits, such as the effects of reductions in acid rain. Discuss the degree to which measuring the economic benefits of a pollution reduction policy will capture ecological benefits. 3. Why do economists generally prefer revealed preference approaches to environmental benefit valuation over stated preference ap- proaches? Are there cases in which stated preference approaches would be recommended? 4. Explain the difference between use and nonuse value, with refer- ence to a particular environmental policy in which you may be in- terested, such as greenhouse gas emissions reductions or endangered species preservation. 5. Should environmental and natural resource management policies be put to a strict benefit–cost test? Why or why not? 6. Some environmental laws in the United States explicitly prohibit the use of benefit–cost analysis in some areas of environmental pol- icy. For example, the Clean Air Act declares that air quality standards are to be determined purely on the basis of protecting public health with “an adequate margin of safety” and forbids the administrator of the Environmental Protection Agency from considering costs in setting standards. Can you provide a critique of such an approach, from the perspective of economic efficiency? What might be the consequences of such an approach? Now take a step back. From discussion questions 261 your own perspective, do you think such an approach is advisable? Why or why not? 7. Contrast the economic perspective on endangered species preserva- tion with the perspective that individual species have infinite value. What are the implications of each perspective for public policy? 8. Economic analyses indicate that reducing timber extraction in the U.S. Pacific Northwest in the 1990s, to preserve old-growth habitat for the endangered northern spotted owl, had significant net ben- efits. Yet many logging communities experienced significant eco- nomic dislocation as a result of these policies. Discuss the links, if any, between economic efficiency and distributional equity in this case. Was reducing timber extraction a Pareto improvement? Chapter 4 1. Explain why a demand curve can be considered to be a marginal benefits curve and why a supply curve is equivalent to a marginal cost curve. Refer to a specific environmental problem in your answer. 2. Describe a situation in which you would expect the free market to result in an efficient outcome with respect to environmental quality or natural resource management and one in which you would not. Chapter 5 1. Describe the efficiency loss that results when the social costs of pol- lution are external to the private costs of producing a good such as electricity. How do the market price and quantity of electricity with pollution externalities compare to the efficient price and quantity? What are the potential gains to society from regulating pollution? 2. Examine figure 5.1 and imagine that the marginal damages of pol- lution were much flatter than the curve represented here. How would this change the magnitude of the deadweight loss from pol- lution in this case? What are the intuitive implications? 3. Contrast a pure public good, such as biodiversity preservation, with an open-access resource, such as some fisheries and groundwater aquifers. How do these classes of goods and services differ, and what are the implications for environmental policy? 4. Many people contribute money to environmental advocacy orga- nizations. Can we measure the benefits of the services provided by these organizations by summing up contributions? Why or why not? 262 discussion questions 5. Explain the link between public goods and positive externalities. 6. In the international environmental treaty “game” described by fig- ure 5.5, both countries would be better off if each contributed to the cleanup of a shared pollution problem, but this is not what we expect to happen. Why is this better outcome unlikely to occur? Chapter 6 1. If we take the world’s known reserves of oil and divide this total quantity by average annual oil consumption, we obtain the reserves- to-use ratio, the number of years that remain before exhaustion of our oil resources. Explain why this ratio paints a misleading picture of oil scarcity. 2. The Hotelling Rule states that marginal user cost rises at the rate of interest. Explain the intuition behind this result. 3. Under what conditions would you expect the extraction rate of a nonrenewable natural resource to depart from the dynamically ef- ficient rate? 4. Oil and endangered species are both natural resources with high economic value. Yet a private landowner in the United States might react very differently to the discovery of an oil well on her property than she would to the discovery of an endangered species popula- tion. Explain this difference, using economic concepts. 5. Economist Robert Solow has said that “the monopolist is the con- servationist’s friend.” Explain this in the context of nonrenewable resource extraction. Chapter 7 1. The models we explore in Chapters 6 and 7 (nonrenewable re- sources, fisheries, and forests) all refer to the concept of economic rent. Define rent and explain its relationship to economic efficiency. 2. Explain the relationship between the biological timber rotation, the Wicksell rotation, and the Faustmann rotation. Which one is eco- nomically efficient, and why? 3. Forests generate nontimber benefits. Explain the effects of the fol- lowing nontimber values on the efficient timber rotation: (a) new growth provides habitat for white-tailed deer, (b) old-growth for- est provides habitat for the endangered red-cockaded woodpecker, and (c) decaying trees provide habitat for an important insect spe- cies. How should policymakers incorporate competing forest values such as these into forest management decisions? discussion questions 263 4. Explain the link between the establishment of property rights and deforestation in tropical countries. Given our discussion in this chapter, does this imply that large-scale privatization of land in tropical regions is a solution to deforestation? 5. A fishery will always be economically overfished before it is bio- logically overfished, and therefore the economically efficient level of fishing effort is lower than the biologically efficient level. Explain why this is true. 6. Under open access, fishing will occur until the total benefits are exactly equal to total costs, and net benefits are equal to zero. Why don’t fishers stop entering the fishery before this happens? 7. Explain precisely why reducing fishing effort from the open-access equilibrium would be efficient. What would be the effect on fishing communities in the short run? In the long run? 8. Imagine that a national government reduces the marginal cost of fishing effort through a subsidy, such as a fuel tax exemption. How would this subsidy affect the open-access equilibrium level of fish- ing effort, represented in figure 7.6? Would the net benefits of the fishery still be zero in this case? 9. History offers many examples of small groups of farmers collec- tively managing shared irrigation systems, yet there are also many examples of inefficient depletion of groundwater aquifers due to agricultural irrigation. Use the concepts of common property and open access to describe a potential explanation for these two very different phenomena.