Chapter 5: The Economics of Environmental Quality

Question 1

Normative statement

Answer 1

• expresses an opinion, what should happen (socially efficient level of emissions)

Question 2

Positive statement

Answer 2

• expresses a fact, what is happening (actual target level of emissions and how much needs to be reduced)

Question 3

Steps in Policy analysis

Answer 3

1. Identify target level of environmental quality (focus of this chapter)
2. Divide the burden of pollution reduction among polluters
3. Determine set of policy instruments to be used
4. Asses benefits and costs and their distributional consequences

Question 4

Pollution damages

Answer 4

• Refers to the negative impacts that users of the environment experience because of degradation of the environment
• People have a WTP to avoid damages caused by pollution

Question 5

• Damage function

Answer 5

• Shows the relationship between the quantity of a waste product and the value of its damages

Question 6

Marginal damage function: factors

Answer 6

1. Location- damages may be higher in urban areas than rural areas
2. Knowledge- the more you know about the impacts of pollution, the more you are WTP to avoid it
3. Tastes and preferences- if my child has asthma, I have a higher WTP to reduce pollution
4. Ability to pay- pollution damages are higher in low income areas

Question 7

Marginal abatement costs

Answer 7

• the cost of abating the next unit of emissions
• rises exponentially as the amount of emissions to be abated increases
• the more pollution you abate, the higher cost of abating the next unit of emissions because you have already abated the lowest cost units

Question 8

Aggregate abatement costs

Answer 8

• individual functions must be added horizontally to yield the lowest possible aggregate abatement costs

Question 9

Equi-marginal principle

Answer 9

• requires that the total production be distributed among sources so that their marginal costs of production are equalized
• an aggregate MAC function will always represent the minimum MAC achievable
• the aggregate level of emissions will be distributed among different sources in a way that equalizes MAC
• under the equi-marginal principle, abate the cheapest unit of pollution first, no matter which factory emits it

Question 10

Socially efficient level of emissions

Answer 10

• where MAC and MD functions equal
• one price for everyone
• all firms must have the same cost to make it socially optimal