### 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:
• Area of Aquifer: A = 1000 acres
• Minimum Depth: D0 = 50 feet
• Demand for Water: P = 20 - Q/500
• Marginal Extraction Cost: MEC = D/10
• Annual Recharge: R = 4000 acre-feet
• Interest Rate: i = 0