Economics 359M

Peter J. Wilcoxen
Department of Economics
University of Texas at Austin

Exam 2

Fall 1991

Section 1: Short Answer (3 parts, 15 points total)

Explain your position as completely as possible. If you use graphs, be sure to explain what each one is intended to show.
  1. Some features of water law encourage inefficient use of surface water and aquifers. Explain.
  2. What are criteria pollutants? What are nonattainment areas? How are these related to PSD and BACT?
  3. Would a drop in the interest rate increase or decrease the rotation period of an optimally managed forest? Why? Explain.

Section 2: Essay (3 parts, 45 points total)

Answer each of the following questions. Use graphs or models wherever it would help support your argument.
  1. Discuss the Coase Theorem. What is it? Is there any evidence to support it? In what circumstances is it likely to be relevant? Do you think it has much relevance for the control of criteria air pollutants? Why or why not?
  2. Why do fisheries tend to be overexploited? Explain in detail how the market equilibrium compares to the equilibrium a planner would choose. Compare and contrast three measures the government might adopt to improve the management of a fishery.
  3. What is contingent valuation? Discuss the pros and cons of using it to compute the value of a nonmarketed environmental amenity. Suppose you were assigned the task of computing the value of recreation at a reservoir; would you use contingent valuation or the travel cost method? Why?

Section 3: Problem (3 parts, 15 points total)

Consider a common-property aquifer which takes the form of a cylinder of area A whose top is D0 feet below the ground and whose bottom is very deep. The aquifer receives an annual recharge from rainfall but once it fills to D0 any additional water is lost to runoff. Let D be the distance in feet from the ground to the water level and Q be the annual amount of water extracted from the aquifer. In addition, suppose the following are true: Please answer the following questions:
  1. Assuming the aquifer starts out full in year 0 what will be the values of the following variables in year 0 and year 1: D, P and Q? Be sure to show all your work.
  2. Prove that the results from part (1) will not be efficient. In addition, explain intuitively why this is so.
  3. Suppose the government were to take control of the aquifer in order to manage it more efficiently. What pattern of annual extraction rates would it prefer? Explain. If the government were to charge for water extracted from the aquifer what should the price be?