API 135/Econ 1661 Final Review

1. API 135/Econ 1661 Final Review 5/7/2011 Gabe Chan Avinash Kishore

2. 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

3. 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

4. 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

5. 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

6. 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?

7. Economics of the Fishery: Know Diagrams and how to draw them

8. Determining effort level Total cost with regulation

9. Break

10. 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)

11. 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?

12. 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)

13. Incentives for tech change

14. 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)

15. 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?

16. Climate Policy

17. 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 taxes Cost-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

18. Key Concepts • 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

19. 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

20. 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

21. Backup

22. 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

24. Major topics from the course • Economic causes of environmental problems • Cost effectiveness & efficiency • Efficiency analysis: benefits & costs • Natural resources • Cost effectiveness analysis: policies for pollution control • Climate Change • Trade and the Environment

25. 7. Is trade good or bad for the environment?

26. 7. Is trade good or bad for the environment? Explanation: global externality, lack of a comprehensive global climate agreement

27. 7. Trade and the Environment • Do the WTO & environment conflict? • How can globalization best be harnessed?