JAMES COOK UNIVERSITYO F N O R T H Q U E E N S L A N D

TOWNSVILLE Queensland 4811 Australia Telephone: (077) 81 4111

SECOND SEMESTER EXAMINATIONS 1997CAMPUS: Townsville

STUDENTNAME:(Hock letters)

I STUDENT NUMBER:

SUBJECT CODE: ~moo3:03 / ~=5201:03

SUBJECT NAME: Introduction to Environmental Economics

EXAMINER: MS Lyndal Ramm PHONE NO: Ext. 4887 / 4788

DURATION OF EXAMINATION (hours):Three (3) hours

PERUSAL TIME (minutes):Ten (10) minutes

TOTAL NUMBER OF QUESTIONS: Eight (8)

INSTRUCTIONS TO STUDENTS:

Answer ANY FOUR questions.The questions are of equal value.

MATERIALS TO BE SUPPLIED BY EXAMINATIONS SECTION:Examination Booklets required (Ye&e)

MATERIALS STUDENTS MAY USE:

CZikUhtOr (non-progranable)

Access to an English Dictionary:Yes d No c l

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C a m p u s e s a t - T O W N S V I L L E C A I R N S M A C K A Y

ANSWER ANY FOUR QUESTIONS

Question 1

The travel cost method is a technique used by economists in an attempt to value theenvironment.Critically discuss this method and explain what is meant by the term totaleconomic value.

Question 2

The following data relate to a proposed mining project to be developed by XYZ Mining CoLtd.

Mining operations are expected to last 6 years after one year of development with no mining.The first year of mining would be 1999.XYZ has spent $4.5 million in the past in researchand development of the project.

Capital costs will be:* $10 million in 1998, $15 million in 1999 and $12 million in 2000, for the establishment of

roads, factory and other infrastructure.

* $8 million in 2002 for extending the mine site.

* $4 million in 2005 for closing down the site and removal of plant.

Revenue from the sales of the minerals will be zero in 1998, $14 million in 1999 and increaseby 25% per annum up to and including 2002, and decline 10% per annum until the end of2004.Operating costs will be 30% of revenue.

The site will be damaged permanently in 1998 and the present value of the environmental costswill be $23 million.

All data for costs and revenue have been adjusted for inflation and are expressed in 1998prices.The appropriate nominal rate of discount for such projects is considered to be 17.6%.The rate of inflation over the period is expected to be 5%.Use the real rate of discount.

(a) Construct a cost-benefit table and calculate the net present value for the project ignoringall externalities (or environmental effects), to obtain NW,. Make a recommendationbased on WV,, regarding the feasibility of the project.

(b) Adjust NPV, to incorporate the environmental effects to obtain NW,. Make arecommendation based on NW, regarding the feasibility of the project.

** SHOW ALL WORKING** ALL WORKING TO BE DONE TO 2 DECIMAL PLACES

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Question 3

(i) Critically examine the pollution permit trading system as a pollution control instrument.

(ii) Assume that there are two firms each emitting 10 units of pollution into the environmentfor a total of 20 units of pollution in their region.Each polluter faces distinct abatementcost conditions.

Polluter 1: TAC, = 1.25(AJ2 Polluter 2: TAC, = 0.3125 (AJ

MAC, = 2.5 (A,) MAC, = 0.625 (AJ

where:

TAC, = total abatement cost of Firm 1

TAC, = total abatement cost of Firm 2

MAC, = marginal abatement cost of Firm 1

MAC, = marginal abatement cost of Firm 2

At = level of abatement by Firm 1

-A2 = level of abatement by Firm 2

The government has decided that the acceptable level of pollution for this region is 10units and it decides to reach this level by using a tradeable pollution permit system.Itissues 10 permits, each of which allows the bearer to emit one unit of pollution.Assumethe government allocates 5 permits to each polluter.

(a) Analyse the cost implications for each firm and for society, if the permit systemdoes not allow for trade.

(b) Analyse the cost implications to society and to each firm when Firm 1 buys onepermit from Firm 2 at a price of $8.

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Question 4

It has been argued that there may be a limit to economic growth due to waste receivingcapacity and resource availability. Explain what is meant by these limits to growth. Discussthe relationship between population growth, economic growth, natural resource availabilityand waste receiving capacity.Critics argue that there are a number of reasons why there maynot be limits to economic growth.Discuss four of these reasons.

Question 5

Discuss the three broad policy approaches that may be undertaken to deal with the greenhouseproblem. Why is it much harder to implement international pollution controls dealing withproblems such as acid rain and ozone depletion, than it is to implement local pollution controlswithin Australia?

Question 6

There are four broad classes of government intervention to correct market failures associatedwith externalities. Discuss each of these, their applicability to environmental problems, andprovide examples.

Question 7

What is meant by sustainable development? Can traditional western economic developmentbe sustainable economic development?

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Question 8

What is the Coase Theorem?

Assume that there are two competing uses for a hypothetical river - private individuals can usethe river for recreational use or refineries can use the river for release of toxic chemicals fromproduction.

Using the graph below, explain the bargaining process according to the Coase Theorem whenthe refineries have the right to pollute, and then when the property rights are vested in therecreational users.

Discuss the limitations of the Coase Theorem, as a basis for policy.

P per barrel6)

$42

Pe = 26

PC =22

Where:

S=MPC

= MSB

Qe = 128 Qc = 160 Q (thousands of barrels)

MPB = marginal private benefitMSB = marginal social benefitMPC = marginal private costMSC = marginal social costMEC = marginal external costD = demands = supply

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