Environmental Economics Test Questions Essay

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Market
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refers to the interaction between consumers and producer for the purpose of exchanging a well defined commodity
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supply function
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based on the decisions of producers
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demand function
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based on the decisions of consumers
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competitive goods
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large #s of independent buyers and sellers with no control over price–a homogenous product– the absence of entry barriers–perfect information
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resources
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no individual firm has control over input prices
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private good
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rivalry in consumption and excludability
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utility
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consumers purchasing satisfaction
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demand
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the quantities of a good the consumer is willing and able to purchase at some set of prices during some time period
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Demand price
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willingess to pay
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market demand
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representing all consumers who are willing and able to purchase the commodity
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horizontal summing
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sum of quantities at each demand price
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law of supply
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the relationship between the quantity supplied and price is generally a positive one
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equilibrium
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is the price at which quantity demanded by consumers
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allocative effieciency
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proper allocation of resources among alternative uses –an assessment of benefits and costs–the use of marginal analysis–requires that the additional value of society places on another unit of the good is equal to what society must give up in resources to produce it
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Technical efficiency
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concerned with economizing on resources used in production-refers to production decisions that generate maximum output,given some stock of resources
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Profit maximization
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where marginal revenue= marginal cost
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consumer surplus
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is a measure of net benefit accruing to buyers of a good estimated by the excess of what they are willing to pay over what they must actually pay
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Producer surplus
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measure net gain to sellers, estimated by the excess of market price over marginal cost aggregated over all units sold
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society’s welfare
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economists use the sum of consumer and producer surplus to capture the gains accruing to both sides of the market
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Market failure
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something that distorts the classical market outcome/ inefficient market conditions (ex. Pollution)
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public good
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if the market is defined as “environmental quality” then the source of the market failure is that environmental quality–nonrival in consumption and its benefits are nonexcludable
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externality
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a spillover effect associated with production or consumption that extends to a third party outside the market–if the market is defined as the good whose production or consumption generates environmental damage
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nonrivalness
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a notion that the benefits associated with consumption are indivisible- meaning that when the good is consumed by one individual another person is preempted from consuming at the same time
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nonexcludability
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means that preventing others from sharing in the benefits of a good’s consumption is not possible
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Market failure arises from
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the inability of free markets to capture the WTP for a public good
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Nonrevelation of preferences
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an outcome that arises when a rational consumer does not volunteer a WTP because of lack of market incentive to do so
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Free-ridership
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recognition by a rational consumer that the benefits of consumption are accessible without paying for them
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Public goods market
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intervention usually done by government with policies that serve solutions to the problems arising form imperfect information
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negative externality
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an external effect that generates cost to a third party
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positive externality
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an external effect that generates benefits to a third party
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Environmental externalities
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those affecting air, water, or land
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Competitive equillibrium
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the point where marginal private benefit equals marginal private cost or where marginal profit=0
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efficient equillibrium
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the point where marginal social benefit equals marginal social cost or where marginal profit=marginal external cost
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property rights
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the set of valid claims to a good or resource that permits its use and the transfer of its ownership through sale
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Coase Theorem
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assignment of property rights, even in the presence of externalities, will allow bargaining such that an efficient solution can be obtained–transactions are costless–damages are accessible and measurable
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government intervention
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will internalize the externality as a solution to environmental externalities
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incremental benefits
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the reduction in health, ecological, and property damges associated with an environmental policy initiative
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primary environmental benefit
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is a damage-reducing effect that is the direct consequence of implementing policy (ex. more stable ecosystems, less incidence of respiratory ailments)
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secondary environmental benefit
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is an indirect gain to society associated with policy implementation (ex. higher worker productivity from improved health)
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user value
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benefit derived from physical use of or access to an environmental good
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existence value
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utility or benefit recieved from an environmental good simply through its continuance as a good or service (preservation of bald eagle)
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Direct user value
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benefit derived from directly consuming service provided by an environmental good (swimming in a lake)
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indirect user value
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benefit derived from indirect consumption of an environmental good (aesthetic value)
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Vicarious consumption
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utility associated with knowing that others derive benefits from an environmental good
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stewardship
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sense of obligation to preserve the environment for future generations
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Physical linkage approach
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estimates benefits based on a technical relationship between an environmental resource and the user of that resource
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Damage function method
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uses a model of the relationship between levels of a contaminant and observed environmental damage to estimate the damage reduction arising from a policy (Physical)
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Behavioral linkage approach
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estimates benefits using observations of behavior in actual markets or survey responses about hypothetical markets
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Political Referendum
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uses the actual market of a public good by monitoring voting results from a political referenda on proposed changes in environmental quality (direct Behavioral)
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Contingent valuation method
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employs surveys to inquire about individuals’ willingness to pay for environmental improvements based on hypothetical market conditions (direct Behavioral)
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averting expenditure method
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assesses changes in an individuals’ spending on goods and services that are substitutes for personal environmental quality to assign value to changes in the overall environment (indirect behavioral)
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Travel cost method
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values a change in the quality of an environmental resource by assessing the effect of that change on the demand for a complementary good (indirect behavioral)
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Hedonic price method
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uses the theory that a good is valued for the attributes it posses to estimate the implicit or hedonic price of an environmental attribute and identify its demand as a means to assign value to policy (indirect Behavioral)
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Environmental cost
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the cost of environmental improvement. Executing all resources used to design, implement, and execute the policy. Lot of Gov. spending required to identify all costs. Combine that with the amount of environmental regulations. Problem with these costs is that many are understated.
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incremental costs
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The appropriate level of analysis for evaluating the cost of an environmental initiative. The rationale is to allow a comparison between post-policy expenditures and their pre-policy level, which we call the baseline. Incremental costs are calculated by first identifying the existing level of environmental expenditures, and then finding the difference between the two. These costs should reflect changes in economic costs.
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explicit costs
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Administrative, monitoring, and enforcement expenses paid by the public sector as well as compliance costs.
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implicit costs
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Concerned with any nonmonetary effects that negatively affect society’s well being.
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capital costs
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Expenditures for plant, equipment, construction in progress, and the costs of changes in production processes reducing pollution. Incurred regardless of amount of pollution abated
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operating costs
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Costs incurred in operation and maintenance of pollution abatement processes, including spending on materials, parts and supplies, direct labor, fuel, and R & D. Directly related to quantity of abatement, comparable to variable costs.
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social costs
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expenditures needed to compensate society for the resources used to maintain utility level. Accounts for all price, output, and income effects arising from regulation.
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real-resource compliance costs
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direct costs associated w/ purchasing, installing, and operating pollution equipment, changing production processes, or capturing/selling waste products.
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Government regulation costs
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monitoring, administrative, and enforcement costs linked to new regulations
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Transitional costs
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Value of resources displaced to regulation-induced production declines and private cost of reallocating those resources.
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indirect costs
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Adverse affects on product quality, innovation, productivity, and market effects indirectly influenced by policy, all of which may affect net levels of surpluses.
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engineering approach
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estimates abatement expenditures based on the least-cost available technology needed to achieve pollution abatement. Relies on external experts
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survey approach
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Derives estimated abatement expenditures directly from polluting sources. Relies directly upon polluting sources. More direct means to obtain abatement costs.
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Benefit-cost analysis
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begins with identifying and monetizing environmental benefits and costs—1. Determine whether or not an opinion is feasible form a benefit-cost perspective 2. Evaluate all feasible options based on a decision rule, and then select a single “best” solution
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present value determinaton
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a procedure that discounts a future value (FV) into its present value (PV) by accounting for the opportunity cost of money
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Social discount rate
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should reflect the rate of return that could be realized through private spending on consumption and investment, assuming the same level of risk = discount rate used for public policy initiatives based on the social opportunity cost of funds
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inflation correction
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adjusts for movements in the general price level over time
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nominal value
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a magnitude stated in terms of the current period
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real value
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a magnitude adjusted for the effects of inflation
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deflating
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converts a nominal value into its real value
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present value of benefits
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the time-adjusted magnitude of incremental benefits associated with an environmental policy change
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present value of costs
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the time-adjusted magnitude of incremental costs associated with an environmental policy change
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Benefit cost ratio
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the ratio of PVB to PVC used to determine the feasibility of a policy option if its magnitude exceeds unity.
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present value of net benefits
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the differential of (PVB-PVC) used to determine the feasibility of a policy option if its magnitude exceeds zero If (PVB-PVC)>0 for a given option the option is considered feasible
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maximize the present value of net benefits
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a decision rule to achieve allocative efficiency by selecting the policy option that yields greatest excess benefits after adjusting for time effects
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minimize the present value of costs
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a decision rule to achieve cost-effectiveness by selecting the least cost policy option that achieves a preestablished objective

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