api 135/econ 1661 final review 5/7/2011 gabe chan avinash kishore
TRANSCRIPT
API 135/Econ 1661 Final Review
5/7/2011
Gabe ChanAvinash Kishore
Overview of reviews
Office hours Today: Right after the review session with Gabe Tomorrow: Room L130 with Liz and Max (3-5pm)
Material for review: Practice final (2009) posted on course website Other practice questions from previous exams This year final exam: Pre: Post Mid-term:: 2:1
Lecture notes are important More emphasis on the 2nd half (2:1). But remember big
concepts from pre mid-term. For 1st half: go over problem sets, practice mid-term
and the mid-term you took .
FINAL EXAM: 5/09 9:00am -12:00 pm 113 Sever Hall
Key Concepts from the 1st Half
Welfare economics Pareto and Kaldor-Hicks +ve net benefits is both a necessary and sufficient
condition for optimal policy: True/False? Why? Cost effectiveness:“designing fast trains to the wrong
station.” Explain what he meant (in economic terms).
Coase Theorem Are government policies are unnecessary to solve
environmental problems? Explain. Numerical problem
Welfare Analysis How discount rate affects NPV? Problems with B-C Ratio as a decision rule
Scale ignored Changing sign changes results
Cost side is relatively simpler: in practice and for exams
Benefit Estimation Why/when do we need stated preference methods? You should be able to explain each method in 1-2
sentences and know the situations when it is best applied. Questions often have >1 parts. Read carefully and answer all
Benefit Estimation
Travel Cost Method Rework problem set 1—all parts. What are main limitations of the method?
Limited applicability, confounds
Hedonic Price/Hedonic Wage Method Does VSL provide an economic estimate of the value of a
human life? Explain. identify two concerns with using marginal implicit prices
from hedonic wage studies for calculations of VSL
Great summary on Page 11 of Lecture 8 of all methods
Natural Resource Economics Hotelling
Rework Problem Set 2, Mid-term and the Sample mid-term
Time rate of change of the marginal user cost of a NR resource. Intuitively, why does this relationship hold?
For a typical nonrenewable resource, would you expect the rate of extraction to increase, be constant, or decrease over time? Why?
Conditions under which HR is not observed in reality?
For quick check: See page 10 of Lecture 9-10 (spl. Points 8-12). Can you answer them all?
Economics of the Fishery: Know Diagrams and how to draw them
Determining effort levelTotal cost with regulation
Break
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Cost effectiveness analysis: policies for pollution control
What’s the difference between efficiency and cost-effectiveness? Same fast train, different station
Pollutants vary in how “mixed” they are (local, regional, global), and how long they “live” (flow, stock, in between)
Know how to show that equalizing MC across sources achieves cost effective allocation. (L 13-15, p 9)
Why is this important? heterogeneous MACs Full list of policy options (L 13-15, p 2) Full list of criteria (L 13-15, p 8)
Standards
How do they work? Know how to analyze graphically Performance of command and control approaches Types of standards-based policies
Technology standards Performance standards Ambient standards Non-uniform standards (cost-effective?) Vintage differentiated standards
Incentives for technological change?
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Pollution Taxes
How do they work? Know how to analyze graphically & how to
determine the tax that will achieve a given target. Know how to model incentives for tech change Political feasibility? (the “T” word)
Incentives for tech change
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Tradeable permits How do they work? Know how to analyze graphically and how to determine the
equilibrium allocation. Issues with CAT
Point of regulation (upstream, downstream) Allocation – free or auction Cost containment mechanisms Responsiveness to growth, inflation, tech change
The independence property of permit allocation (Coase): The final distribution of emissions and the final marginal
abatement cost incurred by firms is independent of initial allocation of permits (under usual conditions: no transaction costs)
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Policy instrument comparisons
Uncertainty: relative slopes rule (Weitzman) What happens when MB and MC are uncertain
and correlated? Know the graphs and know the results
Taxes vs. Tradable Permits See L13-15 pg 21-22
Applications: lessons from CAA and Acid Rain control What was the nature of the problem? How did firms comply?
Climate Policy
Policy Instruments for GHG Control
Voluntary agreements (e.g. USCAP)These already exist; environmental impact is close to zero
Command-and-control regulation (e.g. energy efficiency standards, CAFE standards)Not cost-effective, requires extensive information, behavioral advantages?
Carbon taxesCost-effective, but politically challenging
Cap-and-trade systems (e.g. EU ETS)Also cost-effective, politically more feasible?
Hybrid systems (essentially a cap-and-trade system with additional permits if the price crosses a lower or upper threshold)Has features of a tax and a cap-and-trade system
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Key Concepts
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Science GHG emission sources, atmospheric mixing and lifetime uncertainty, distribution of impacts
International Climate Policy 3 policy architecture classes baseline years linkage, CDM (emission reduction credits) UNFCCC country groupings, free-rider problem trade & the environment (good/bad matrix), leakage, border
adjustment tariffs National Climate Policy
general approaches (tax, C&T, command & control, standards) cost containment (banking/borrowing, price ceiling/floor, offsets) technological change distributional equity (allocation and independence principal) upstream vs. downstream, economy-wide vs. sectoral
Sub-national Climate Policy preemption, negative/benign/positive interactions with nat’l policy leakage
Substantive Knowledge Science
general understanding of the greenhouse effect, uniformly globally mixed, long atmospheric lifetimes, several important GHGs
International Climate Policy UNFCCC Kyoto Protocol (too little, too fast, why?) COPs: Copenhagen, Cancun, (Durban) WTO alternative venues (G-20, MEFs, etc.) CDM
National Climate Policy Waxman-Markey, (Collins-Cantwell) EPA vs. MA and endangerment
Sub-national Climate Policy CA AB32, (Western Climate Initiative) RGGI
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Models to know(Partial list)
Externalities and the efficient level of production Socially efficient level of pollution control Travel cost Hedonic wages and property values Dynamic efficiency: non-renewables (2 period) Fisheries Cost effectiveness (2 firms; tradeable permits &
taxes) Technological change and instrument choice Weitzman rule
Backup
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6. Climate change
Nature of the policy challenge Toolkit of incentive-based instruments Challenges associated with achieving
international cost effectiveness. Economic assessment of the Kyoto Protocol. Elements of Stavins’ proposed architecture
Emissions tax Cap and Trade Hybrid
Price instrument Greater certainty re marginal cost May be below or above policy target for quantity Compensate through revenue but leave distribution up to politicians Politics: don’t need to distribute allowances, easier to explain Admin: firms are used to taxes, less so to trading
Quantity instrument, emissions are fixed Price volatility Easier to harmonize with other systems Compensate through allowances and/or revenues, discretion in allowance allocation. Can reproduce the benefits of the tax approach Politics: alternative to aversion to taxes History of successful CAT systems
Most advantages of CAT but limits price volatility and cost-side uncertainty But no upper limit on aggregate emissions Liked by business but harder sell to environmentalists and EU
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Major topics from the course
1. Economic causes of environmental problems2. Cost effectiveness & efficiency3. Efficiency analysis: benefits & costs4. Natural resources5. Cost effectiveness analysis: policies for
pollution control6. Climate Change7. Trade and the Environment
7. Is trade good or bad for the environment?
Environmental effects of trade
via growth in income:
for a given level of income :
Harmful effects
larger scale of economic activity
“Race to the bottom” in national regulation
Beneficial effects
shifts to cleaner techniques and composition of economic activity
“Gains from trade”: ratcheting up standards, consumer power, innovation…
7. Is trade good or bad for the environment?
Environmental effects of trade
via growth in income:
for a given level of income :
For SO2 Yes, pollution decreases after $5,700 p.c. via regulation
Yes, favorable effect dominates
For CO2 No evidence of reduced emissions with growth
Trade may increase emissions
Explanation: global externality, lack of a comprehensive global climate agreement
7. Trade and the Environment
Do the WTO & environment conflict? How can globalization best be harnessed?