### Economics 359M

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

### Exam 2

Fall 1992

#### Section I, Essay (5 parts, 40 points total)

Answer each of the following questions. Explain your position as completely as possible in the time allowed. If you use graphs, be sure to explain what each one is intended to show.

1. Between 1949 and 1973 US oil use grew at 5% per year. From 1973 to 1989 it grew (on average) 0% per year. Why? Discuss Limits to Growth in light of this.

2. The buffalo has virtually disappeared from the American plains. Using the methods we covered this semester, explain how this came about (in economic rather than historical terms) and discuss whether or not it was likely to be efficient.

3. What is contingent valuation? Discuss the pros and cons of using it to compute the value of a nonmarketed environmental amenity.

4. Discuss the Coase Theorem. What is it? Is there any evidence to support it? In what circumstances is it likely to be relevant?

5. Briefly describe two market-based methods for controlling pollution. What advantages do these methods have over command and control regulation?

#### Section II, Problem 2 (4 parts, 32 points total)

Imagine you've been put in charge of parcel of rain forest in the Amazon. The forest has two mutually exclusive uses: it can be left as a national park or it can be logged. As a park it provides amenity benefits but no timber; if it is to be logged it provides timber but no amenity benefits. Once the parcel is logged the soil erodes and the forest can never be reestablished. Moreover, the erosion clogs streams and produces an external cost (externality) of \$C per year forever. Finally, there are no planting or harvesting costs.

1. Starting from first principles show that the efficient time to cut down the forest (if it is cut down at all) is when the following is true: dS/dT = r*S - C/P (dS/dT is the derivative of S with respect to T)

2. Now suppose that S(T) = 2T, P=\$50, C=\$50 and r=5% (you may assume these values hold in the remainder of the problem). Solve for the efficient value of T (the cutting date) and then calculate the net present value to society of logging the forest. Also calculate the cutting date a competitive firm would choose and explain why it differs from the efficient date.

3. Now imagine that a travel cost study indicates that the public's willingness to pay for amenity benefits from a national park is given by P = 5 - Q/2, where Q is the number of visits to the park. The park is not congested and there is no admission fee. If the land is left as a park, what will be the value of the amenity benefits it produces each year? What will be the total present value of the park?

4. What should be done with this parcel of land? Why? Discuss how both irreversibility and the fact that the benefit information was obtained by the travel cost method affect your recommendation.