ES 100 Fall 1998

Introduction to Environmental Studies Bubier & Ellison

Mid-term II: Affluence and Economics

1 (3 points total). Compare and contrast each pair of terms, and provide an example for each (1 point each):

a. utility vs. marginal utility Utility is total benefit accruing from any purchase (or all purchases), while marginal utility is the additional benefit accruing from each additional purchase.

b. the "invisible hand" vs. command-and-control Free markets vs. administrative and governmental intervention.

c. affluence vs. inequality Affluence is having lots of wealth; Inequality is difference between those who have and those who don't

2 (8 points total). Consider the following graph:

a.(2 points). Label the axes and label the two lines y: price; x: qty; down-slope is MU; up-slope is MC.

b (3 points). Describe in not more than one paragraph the interpretation of this graph in terms of conventional economics. Supply and demand curve. The intersection is the equilibrium price where MU = MC and is where the free market will ideally tend to

c (1 points). Modify this graph to include environmental externalities. Be sure to label your new line. New marginal cost curve, above existing one, should label as "social costs"

d. (2 points). Explain how equilibrium price and quantity change from before to after introducing externalities into the model. Price goes up, qty goes down.

3 (4 points total). Some enviromentalists assert that the perpetuation of the free trade principle of comparative advantage will cause increased environmental degradation in developing countries.

a. (1 point) Define comparative advantage The principle of comparative advantage says that it is in the best interest of each country to maximize production of those commodities which it produces most efficiently or most cheaply and import what it cannot produce efficiently or cheaply.

b. (3 points) Defend this assertion in not more than one paragraph. The principle of comparative advantage pushes an economy toward specialization. Increased specialization will cause developing countries to base their economies on export commodities, like timber, or on certain agricultural crops, like cotton or coffee, which an be environmentally damaging. Intensive specialization undermines efforts to promote diversified, community-based economies that are less resource-intensive and more harmony with local ecological constraints.

4 (5 points total)

a (2 points). Give an example of a market-based policy instrument that could reduce pollution. SO₂ emissions permits; green taxes (requires an example); pollution permits

b. (3 points). In not more than one paragraph, explain why conventional economists argue that market-based policy instruments are superior to direct administrative controls when it comes to reducing environmental impacts of production. 'Cause it's the free market at work. It's more efficient, and provides incentives to companies to comply. Command and control (direct administrative controls) provide no incentives to reduce pollution below arbitrarily fixed values, and encourage cheating.