Question 1

(a) Profits (= PS) rise by more than consumer surplus falls under free trade. The gains of trade are measured as a quasi-triangle below exports and above A.

(b) Yes, because consumption is lower under free trade than autarky, not only does the     standard proof work; it is actually strengthened because the externalities (arising from consumption) are less. Note, this is only true ifyou ignore the externalities where the good is finally exported to.

(c) Not necessarily, because production has gone up, there are now additional production externalities. These may outweigh the gains mentioned in (a).

(d) It would help to consider the problems from a consumption point of view; coal        exported will be burnt somewhere. It is difficult to measure these externalities, but  any attempt leads to them being taken more seriously. Finally, pushing for uniform health and safety standards would, if feasible, reduce incentives for trade to take the path of production locating to the most lax jurisdiction.

Question 2

(a) The scarcity rent or the marginal user cost.

(b) 6/(1+r)=5.45 => r=0. 1 (or 10%)

(c) It would fall. (More weight would now be placed on period 2.)

(d) It would decrease.

(e) It would stretch out along the bottom axis. Both the optimal consumption in period 1 and 2 would increase and the scarcity rent would fall.

(f)  MNB1 = 6 – 0.4Q1 =  (6 – 0.4Q2)/(1+r). Use r=0. 1 and Q2 = 20- Q1 . 6.6 – 0.44 Q1 = 6 – 0.4*(20- Q1). After some algebra, you will find Q1 = 10.24 and Q2 = 9.76.

Question 3

Some elements to include:

1.   The market mechanism of increased prices (which reflect increasing scarcity) will aid innovation and will create incentives to 1) recycle and 2) find substitutes

2.   In the limit, some resources have non-depletable alternatives; sunlight will always be available for some energy

But

3.   A price of infinity is equivalent to running out, and very high prices render the resource use impractical

4.   Some things are not replaceable at any price, like an atmosphere

5.   Markets need to price in all externalities to get efficient (either static or dynamic) outcomes

6.   Markets need property rights to work properly; fortunately, many mined resources do make it easy to define property rights

It is probably best to evaluate each resource on a case by case basis.

Question 4

a)   i)   Hartwick rule (weak sustainability): Invest scarcity rent from environmental endowment into capital. Keep capital + natural stock constant, only consume     interests.

ii)        Strong sustainability: maintaining the value of natural capital

iii)       Environmental sustainability: requires to maintain certain physical flows of certain key individual resources

Environmental sustainability is the strictest sustainability criterion, the Hartwick rule the weakest.

b)  Which of the following examples violate any (or several) of the sustainability criteria? Which criterion is violated (if any)? Briefly explain your answer.

a.   Norwegian Oil Fund is weakly sustainable (as it invests all the proceeds into the fund and only consumes the interests of the investment) but it violates    strong and environmental sustainability because it decreases the natural        capital.

b.  Nauru phosphate mining & trust fund was set up to be a weakly sustainable     fund but violating strong and environmental sustainability. Mismanagement    has led to a massive loss in the fund’s value. Together with a mostly destroyed environment, Nauru finds itself in a difficult economic situation. It is an          example of weak sustainability not necessarily being enough.

c.   Unless you have an ecological footprint below 1 (which is virtually impossible for an Australian), you are violating environmental sustainability. Most likely  you are also violating strong and weak sustainability with your lifestyle

(unless you save a big share of your income to pass it on to future generations).

d.   Extinction of species is an example of a violation of strong (and environmental) sustainability.

Question 5

a)   [See lecture notes on Water]

b)  Ground water is more abundant than surface water, 90% of all fresh water is               groundwater. However, groundwater is a depletable resource whereas surface water is renewable. There are some interactions between ground and surface water.

c)   Groundwater: depletable resource model with a renewable alternative over multiple periods. Surface water: Static model with demand of different users and a fixed (but over time variable) supply of water.

d)  Issues surrounding the management of freshwater include (describe two):

a.   Restrictions on water transfers

b.   Unjustified subsidies

c.   Inefficiently low pricing of water, ie. not including water scarcity rent

d.   Instream flows

e.   Common property rights

e)  Possible remedies or reform could be: [For a description, see lecture notes]

a.   Efficient water pricing (price as a function of volume, factoring in scarcity rent, all users face same prices)

b.   Eliminate distortionary subsidies

c.   Full cost recovery pricing

d.   Water markets (ie., transferable property rights)

e.   Environmental water transaction

f.   Desalination and Wastewater recycling

Question 6

(a) Optimal in the sense of maximising the net benefit for society (ie., maximising society’s welfare/maximising the size of the pie).

(b) ‘Optimal’ pollution relies on different assumptions which might not be shared by everyone. Hence, whether to consider that there is an optimal level of pollution or if no pollution is optimal is a world view.

(c) As abatement gets more and more lax (ie., there is less of it), the cost of the abatement measures decreases.

(d) Pollution becomes increasingly damaging at the margin as the level of it rises

(e) To obtain a total, you add up the marginal one by one. If the units are small, this amounts to working out an area (integral)