Sample Midterm Environmental Economics, 3rd Canadian Edition Field & Olewiler

Your Name: ________________________________ Student #: _______________________

TA: _______________________________________ Tutorial Group: __________________

Part I: True/False/Explain (5 marks each)

1. If the government prices public transit so that it breaks even, then the net benefit of a
cost-benefit analysis must be zero

False: Total benefit is total expenditure plus consumer surplus. If priced to break
even, then the net benefit is the consumer surplus

2. All externalities are Bad and must be eliminated.

False: An externality is any cost or benefit not taken into account by the agent
creating it. Efficiency implies that the externality should be internalized so that the
correct amount is created.

3. The equi-marginal principle will ensure that the reduction in emissions will be the same
for each firm that is subject to regulation.

False: It ensures that the MCs are equated. Each firms emissions will be different
but they will be the most cost effective distribution of emissions

4. Public goods refer to services supplied by government.

False: Public goods are those where consumption of the good by one does not reduce
the available amount for others.

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Sample Midterm Environmental Economics, 3rd Canadian Edition Field & Olewiler

Part II: Interpreting Graphs (5 marks)

5. The Following refer to the diagram below: answer questions in terms of areas on the
graph
a. If emissions are reduced from Eu to E*, what is the net benefit?
Eu-b-f
b. If emissions are at E0, what is the net welfare loss?
b-d-c
c. If emissions are at E1, what is the net social cost?
h-b-g
d. When emissions are E*, what is the total social cost?
0-b- Eu
e. If emissions are zero, what is the net benefit or cost?
0-b-a

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Sample Midterm Environmental Economics, 3rd Canadian Edition Field & Olewiler

Part III: Problems (10 Marks each) Answer all questions in the exam booklets provided.
6. Suppose a public good has the marginal cost given by MC = 4 + 2Q. Skippys MWTP is
given by P = 24 2.4Q. Myrtles MWTP is P = 20 2Q.
a. Find the Aggregate MWTP function.
MWTP = 44 4.4Q
b. Find the socially optimal Q.
44 4.4Q = 4 + 2Q
Q = 6.25, MWTP = 16.5
c. What would be the fair price? Would they both agree to pay it?
Fair = 16.5/2 = 8.25
At Q = 6.25 Skippys MWTP = 9 Myrtles MWTP = 7.5
Myrtle wouldnt agree to the Fair Price

7. The demand for trips across a river is Q = 1000 100P, where Q is the number of trips
per WORK day (assume 250 workdays per year). If the interest rate is 6% determine
which of the following options you would recommend to the government:
a. They can build a ferry for $350,000. It takes one year to build the ferry and it will
run for three years. They would charge a price of $2 per ride, which would just
cover the operating costs.
b. They can build a bridge for a cost of $20 million. The bridge would last forever
and it would be free.

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Sample Midterm Environmental Economics, 3rd Canadian Edition Field & Olewiler

8. Suppose an industry has 4 firms, each with the following marginal (private) cost function
MCi = 4qi (i=1,...,4) and the market demand function is P =12 Q.
a. Find the equation for the industry supply curve
Firm q = 1/4P, Industry Q = P or P = Q
b. Find the equilibrium price and quantity and output per firm.
Q = 6, P = 6, q=3/2

Now suppose that each firm's production causes external damage. The marginal external
cost per firm is MECi = 2qi.
c. What is the marginal social cost per firm (MEC+MC)? If the marginal external
cost was taken into account by all the firms (MEC+MC), what would be the
supply curve and the equilibrium price and quantities.
MSC = 6q; firm supply is q =1/6P industry Q = 2/3P or P = 1.5Q
Q = 24/5 =4.8 P = 7.2
d. Calculate the net welfare cost when firms DO NOT take the MEC into account

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