Environmental Economics
Problem Set 1
Instructions: For questions that require math please show all your work and attempt each problem. Questions that require an explanation please answer in complete sentences.
- MB = 10 – X MC = 2 + X
The pollutant in question is toxic waste, where “X” represents the number of tons of waste that may be removed from the environment. The total number of tons to be removed is 20. Use the above functions for the MB and MC to answer the following questions:
- Graph both the MB and MC; label axes.
- What is the marginal benefit of abating 100% of the pollutant?
- What is the optimal level of abatement? Explain in direct relation to the above functions.
- Why do economist generally prefer revealed preference approaches to environmental benefit valuation over stated preference approaches? Are there cases in which stated preference approaches be recommended?
- Explain the difference between use and non-use value with reference to a particular environmental policy in which you might be interested, such as green house gas emissions reduction or endangered species preservation.
- Suppose you are considering buying a gold deposit. It will cost $1 million per year to construct a mine so that gold can be extracted. The construction period lasts 3 years. In the fourth year, production starts. Each year the mine operates, it will yield a net return (total revenue minus total cost) of $5,000, 000. Gold can be extracted for 6 years. Interested rates are 5%.
- What is the present value of the total net return (total benefit)?
- What is the present value of the total construction cost?
- How much are you willing to pay for the gold deposit?
