CEA Environmental and Resource Economics 2 — Questions and Answers
Question 1: What is the 'social cost of carbon' (SCC) used for in US regulatory economics?
- Estimating the monetary damage caused by emitting one additional ton of COâ‚‚ for use in cost-benefit analysis (Correct answer)
- Setting the carbon tax rate for the federal emissions trading program
- Calculating the subsidy needed to make renewable energy price-competitive
- Measuring the total carbon footprint of a government regulation
Correct answer: Estimating the monetary damage caused by emitting one additional ton of COâ‚‚ for use in cost-benefit analysis
The SCC converts the long-run economic damages from one ton of COâ‚‚ emissions into a dollar figure used by US federal agencies to weigh climate costs in regulatory benefit-cost analyses.
Question 2: Which concept describes the economic value people place on a resource even if they never intend to use it, simply because it exists?
- Existence value (non-use value) (Correct answer)
- Option value
- Bequest value
- Use value
Correct answer: Existence value (non-use value)
Existence value captures willingness to pay for the preservation of an environmental resource—such as an endangered species or pristine wilderness—purely because it exists, independent of any personal use.
Question 3: What does the 'Environmental Kuznets Curve' hypothesis predict about economic development and pollution?
- Pollution first rises then falls as income per capita increases, following an inverted-U shape (Correct answer)
- Pollution increases monotonically with income because richer countries consume more resources
- Pollution declines immediately as countries industrialize due to cleaner technology adoption
- There is no consistent relationship between income and environmental quality across countries
Correct answer: Pollution first rises then falls as income per capita increases, following an inverted-U shape
The Environmental Kuznets Curve hypothesizes that as countries develop, pollution initially worsens due to industrialization but eventually improves as rising incomes generate demand for environmental quality and cleaner technology.
Question 4: In natural resource economics, what is the 'Hotelling Rule' for nonrenewable resource extraction?
- The optimal extraction path requires the resource price to rise at the rate of interest (Correct answer)
- Nonrenewable resources should be extracted at a constant rate over time
- The royalty on resource extraction should equal the marginal cost of production
- Resource prices should remain stable to avoid discouraging future exploration
Correct answer: The optimal extraction path requires the resource price to rise at the rate of interest
Hotelling's Rule states that in a competitive market, the net price (price minus extraction cost) of a nonrenewable resource must rise at the rate of interest to make resource owners indifferent between extracting now and waiting.
Question 5: What is 'contingent valuation' used for in environmental economics?
- Estimating the economic value of non-market environmental goods through survey-based willingness-to-pay questions (Correct answer)
- Valuing environmental assets based on observed market transactions for related goods
- Calculating the contingent tax liability from environmental damage claims
- Measuring the value of ecosystem services using production function approaches
Correct answer: Estimating the economic value of non-market environmental goods through survey-based willingness-to-pay questions
Contingent valuation uses hypothetical market scenarios in surveys to elicit how much respondents would be willing to pay (or accept) for changes in non-market environmental goods like clean water or wilderness.
Question 6: Which market-based instrument provides farmers or forest owners with payments in exchange for maintaining ecosystem services such as carbon sequestration or watershed protection?
- Payments for Ecosystem Services (PES) (Correct answer)
- Tradeable development rights
- Green infrastructure bonds
- Environmental impact fees
Correct answer: Payments for Ecosystem Services (PES)
PES programs create direct financial incentives for landowners to conserve or restore ecosystems by paying them for the public benefits their land generates, aligning private and social incentives.
CEA Environmental and Resource Economics 2
What is the 'social cost of carbon' (SCC) used for in US regulatory economics?