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Environmental Economics 4th Canadian Edition By Field – Test Bank
c6Student: ___________________________________________________________________________
1.  Benefitcost analysis incorporates ________ valuation of all inputs and outputs related to the project whether or not they are transacted in private markets.

2.  If the MAC = 400 – 2E and MDC = 6E the socially efficient scale is equal to ________ units of emissions.

3.  When it comes to determining the appropriate environmental project to select, the ________ link(s) benefitcost analysis to our theoretical model of the economics of the environment.

4.  If the MAC = 60 – 0.25E and MDC = 0.5E the socially efficient scale is equal to ________ units of emissions.

5.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

6.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

7.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

8.  If two projects with uncertain outcomes had the same expected value, but project A had two similar but uncertain outcomes with similar probabilities of occurrence while project B had a low probability of a disaster and a high probability of a positive outcome a ________ decision maker would choose Project A.

9.  Given the information in the following table, ________ is the costeffective way to reduce the phosphorous concentration in the Bay of Quinte.

10.  Benefitcost analysis has been criticized as a means of allowing public agencies to justify everlarger budgets.TrueÂ Â Â Â False 
11.  In Canada, benefitcost analysis has been officially legislated for use by federal government agencies.TrueÂ Â Â Â False 
12.  The socially efficient scale maximizes the net social benefits from a project.TrueÂ Â Â Â False 
13.  Benefitcost analysis is very well suited to the analysis of projects with potentially large longrun impacts on the environment.TrueÂ Â Â Â False 
14.  The social discount rate is similar to the private discount rate except it incorporates a social rate of time preference that reflects the government’s cost of borrowing which is typically lower than that of the private sector.TrueÂ Â Â Â False 
15.  Vertical equity treats people in the same circumstances identically.TrueÂ Â Â Â False 
16.  When it is difficult to estimate the future benefits of a project, costeffectiveness analysis is an alternative approach to conducting a fullbenefit cost analysis.TrueÂ Â Â Â False 
17.  A costeffective project is the one that achieves a given level of benefits at the lowest cost among all the possible project options.TrueÂ Â Â Â False 
18.  One limitation of costeffectiveness analysis is that other techniques that could be more costeffective are not considered because their costs are too difficult to measure.TrueÂ Â Â Â False 
19.  Briefly describe the essential steps in conducting a benefitcost analysis of a project. 
20.  List three criticisms that have been made about benefitcost analysis. 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for five years following construction which takes place in year zero. 
21.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5%. What option do you recommend and why? 
22.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 2%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 2%. What option do you recommend and why? 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for seven years following construction which takes place in year zero. 
23.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 10%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 10%. What option do you recommend and why? 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option have been computed for two population growth scenarios: 1) zero population growth; and 2) higher population growth. The results for each of the two scenarios are summarized in the following table. The project lasts for five years following construction which takes place in year zero. 
24.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 25% while the probability of higher population growth is 75%. What option do you recommend and why? 
25.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 75% while the probability of higher population growth is 25%. What option do you recommend and why? 
26.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 50% while the probability of higher population growth is 50%. What option do you recommend and why? 
c6 Key
1.  Benefitcost analysis incorporates ________ valuation of all inputs and outputs related to the project whether or not they are transacted in private markets.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #1Learning Objective: 0601 Define the basic framework for benefitcost analysis and how it could be used to assess government projects and regulatory actions.Â 
2.  If the MAC = 400 – 2E and MDC = 6E the socially efficient scale is equal to ________ units of emissions.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #2Learning Objective: 0602 Show graphically that a project with maximizes net social benefits will be equivalent to the socially efficient equilibrium.Â 
3.  When it comes to determining the appropriate environmental project to select, the ________ link(s) benefitcost analysis to our theoretical model of the economics of the environment.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #3Learning Objective: 0602 Show graphically that a project with maximizes net social benefits will be equivalent to the socially efficient equilibrium.Â 
4.  If the MAC = 60 – 0.25E and MDC = 0.5E the socially efficient scale is equal to ________ units of emissions.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #4Learning Objective: 0602 Show graphically that a project with maximizes net social benefits will be equivalent to the socially efficient equilibrium.Â 
5.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #5Learning Objective: 0604 Explain how the equity and the distribution of income enter into benefitcost analysis.Â 
6.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #6Learning Objective: 0604 Explain how the equity and the distribution of income enter into benefitcost analysis.Â 
7.  An environmental program is ________ if the net effect of that policy has proportionally ________ effect on lowincome people as on highincome people.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #7Learning Objective: 0604 Explain how the equity and the distribution of income enter into benefitcost analysis.Â 
8.  If two projects with uncertain outcomes had the same expected value, but project A had two similar but uncertain outcomes with similar probabilities of occurrence while project B had a low probability of a disaster and a high probability of a positive outcome a ________ decision maker would choose Project A.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #8Learning Objective: 0605 Describe how expected values can reflect uncertainty and how they can be used in benefitcost analysis.Â 
9.  Given the information in the following table, ________ is the costeffective way to reduce the phosphorous concentration in the Bay of Quinte.

Difficulty: EasyField – Chapter 06 #9Learning Objective: 0606 Define cost effectiveness and when it is used instead of benefitcost analysis.Â 
10.  Benefitcost analysis has been criticized as a means of allowing public agencies to justify everlarger budgets.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #10Learning Objective: 0601 Define the basic framework for benefitcost analysis and how it could be used to assess government projects and regulatory actions.Â 
11.  In Canada, benefitcost analysis has been officially legislated for use by federal government agencies.FALSEIn Canada benefitcost analysis has not been officially legislated for use by either federal or provincial government agencies, but it has been used extensively in the United States. 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #11Learning Objective: 0601 Define the basic framework for benefitcost analysis and how it could be used to assess government projects and regulatory actions.Â 
12.  The socially efficient scale maximizes the net social benefits from a project.TRUENet social benefits are maximized where MAC = MDC. 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #12Learning Objective: 0602 Show graphically that a project with maximizes net social benefits will be equivalent to the socially efficient equilibrium.Â 
13.  Benefitcost analysis is very well suited to the analysis of projects with potentially large longrun impacts on the environment.FALSEBecause of the potentially large impact on future generations, it is difficult to determine the appropriate discount rate for benefitcost analysis so instead, we may wish to avoid projects that reduce the longrun productive capabilities of our natural and environmental resource base, as well as avoiding making decisions that are irreversible, or that preclude taking other options in the future. 
Accessibility: Keyboard NavigationDifficulty: ModerateField – Chapter 06 #13Learning Objective: 0603 Explain the role of discounting in benefitcost analysis and why the social and private discount rates will typically differ.Â 
14.  The social discount rate is similar to the private discount rate except it incorporates a social rate of time preference that reflects the government’s cost of borrowing which is typically lower than that of the private sector.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #14Learning Objective: 0603 Explain the role of discounting in benefitcost analysis and why the social and private discount rates will typically differ.Â 
15.  Vertical equity treats people in the same circumstances identically.FALSEHorizontal equity treats people in the same circumstances identically. 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #15Learning Objective: 0604 Explain how the equity and the distribution of income enter into benefitcost analysis.Â 
16.  When it is difficult to estimate the future benefits of a project, costeffectiveness analysis is an alternative approach to conducting a fullbenefit cost analysis.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #16Learning Objective: 0606 Define cost effectiveness and when it is used instead of benefitcost analysis.Â 
17.  A costeffective project is the one that achieves a given level of benefits at the lowest cost among all the possible project options.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #17Learning Objective: 0606 Define cost effectiveness and when it is used instead of benefitcost analysis.Â 
18.  One limitation of costeffectiveness analysis is that other techniques that could be more costeffective are not considered because their costs are too difficult to measure.TRUECosteffectiveness analysis could omit lower cost possibilities if it does not include options with hard to measure costs. 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 06 #18Learning Objective: 0606 Define cost effectiveness and when it is used instead of benefitcost analysis.Â 
19.  Briefly describe the essential steps in conducting a benefitcost analysis of a project.There are four essential steps in conducting a benefitcost analysis including: 1) prepare a clear overview of the project including specifics about scale and perspective; 2) estimate the social costs and benefits of the inputs and outputs of the project; 3) quantitatively describe the inputs and the outputs of the program; and 4) compare the benefits and costs of the project. 
Difficulty: EasyField – Chapter 06 #19Learning Objective: 0601 Define the basic framework for benefitcost analysis and how it could be used to assess government projects and regulatory actions.Â 
20.  List three criticisms that have been made about benefitcost analysis.The three criticisms that have been made of benefit cost analysis include: 1) public agencies use benefitcost analysis to justify increasing their budgets; 2) benefitcost analysis is used to limit political discussion and decisionmaking about prospective public projects and programs; and 3) benefitcost analysis is a way of limiting spending on public programs because of the difficulty of measuring benefits relative to costs. 
Difficulty: ModerateField – Chapter 06 #20Learning Objective: 0601 Define the basic framework for benefitcost analysis and how it could be used to assess government projects and regulatory actions.Â 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for five years following construction which takes place in year zero. 
Field – Chapter 06Â 
21.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:NPV_{E} = 100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60) = 66.3NPV_{T} = 50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35) = 91.7NPV_{S} = 15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10) = 23.45The municipality should choose the Tertiary option since it generates the highest net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #21Learning Objective: 0603 Explain the role of discounting in benefitcost analysis and why the social and private discount rates will typically differ.Â 
22.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 2%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 2%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:NPV_{E} = 100 + .98(0) + .96(30) + .94(50) + .92(60) + .91(60) = 85.6NPV_{T} = 50 + .98(25) + .96(35) + .94(35) + .92(35) + .91(35) = 105.05NPV_{S} = 15 + .98(5) + .96(10) + .94(10) + .92(10) + .91(10) = 27.2The municipality should choose the Tertiary option since it generates the highest net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #22Learning Objective: 0603 Explain the role of discounting in benefitcost analysis and why the social and private discount rates will typically differ.Â 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for seven years following construction which takes place in year zero. 
Field – Chapter 06Â 
23.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 10%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 10%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:NPV_{E} = 100 + .93(0) + .87(30) + .82(50) + .76(60) + .71(60) + .67(60) + .62(60) = 132.7NPV_{T} = 50 + .93(25) + .87(35) + .82(35) + .76(35) + .71(35) + .67(35) + .62(35) = 129NPV_{S} = 15 + .93(5) + .87(10) + .82(10) + .76(10) + .71(10) + .67(10) + .62(10) = 34.15The municipality should choose the Enhanced Tertiary option since it generates the highest net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #23Learning Objective: 0603 Explain the role of discounting in benefitcost analysis and why the social and private discount rates will typically differ.Â 
A municipality is considering three options for upgrading their sewage treatment plant in order to improve water quality. The three options involve different streams of costs and benefits. The options are summarized in the following table:The net benefits (measured in millions of dollars) for each option have been computed for two population growth scenarios: 1) zero population growth; and 2) higher population growth. The results for each of the two scenarios are summarized in the following table. The project lasts for five years following construction which takes place in year zero. 
Field – Chapter 06Â 
24.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 25% while the probability of higher population growth is 75%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:ENPV_{E} = .25[100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .75[150 + .95(15) + .91(40) + .86(45) + .82(50) + .78(50)] = 40NPV_{T} = .25[50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .75[100 + .95(10) + .91(30) + .86(30) + .82(30) + .78(30)] = 36.25NPV_{S} = .25[15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .75[30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 37.5The municipality should choose the Enhanced Tertiary option since it generates the highest expected net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #24Learning Objective: 0605 Describe how expected values can reflect uncertainty and how they can be used in benefitcost analysis.Â 
25.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 75% while the probability of higher population growth is 25%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:ENPV_{E} = .75[100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .25[150 + .95(15) + .91(40) + .86(45) + .82(50) + .78(50)] = 80NPV_{T} = .75[50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .25[100 + .95(10) + .91(30) + .86(30) + .82(30) + .78(30)] = 88.75NPV_{S} = .75[15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .25[30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 32.5The municipality should choose the Tertiary option since it generates the highest expected net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #25Learning Objective: 0605 Describe how expected values can reflect uncertainty and how they can be used in benefitcost analysis.Â 
26.  Compute the discount factors you would need to conduct a benefitcost analysis of the three sewage treatment options to two decimal places assuming a discount rate of 5%. Then conduct the benefitcost analysis to determine which option the municipality should choose to complete when the discount rate is 5% taking into consideration the uncertainty about population growth. Assume the probability of zero population growth is 50% while the probability of higher population growth is 50%. What option do you recommend and why?The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:ENPV_{E} = .5[100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .5[150 + .95(15) + .91(40) + .86(45) + .82(50) + .78(50)] = 60NPV_{T} = .5[50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .5[100 + .95(10) + .91(30) + .86(30) + .82(30) + .78(30)] = 62.5NPV_{S} = .5[15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .5[30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 35The municipality should choose the Tertiary option since it generates the highest expected net present value of the three choices. 
Difficulty: ModerateField – Chapter 06 #26Learning Objective: 0605 Describe how expected values can reflect uncertainty and how they can be used in benefitcost analysis.Â 
c6 Summary
Category  #Â ofÂ Questions 
Accessibility:Â KeyboardÂ Navigation  17 
Difficulty:Â Easy  18 
Difficulty:Â Moderate  8 
FieldÂ –Â ChapterÂ 06  29 
LearningÂ Objective:Â 0601Â DefineÂ theÂ basicÂ frameworkÂ forÂ benefitcostÂ analysisÂ andÂ howÂ itÂ couldÂ beÂ usedÂ toÂ assessÂ governmentÂ projectsÂ andÂ regulatoryÂ actions.  5 
LearningÂ Objective:Â 0602Â ShowÂ graphicallyÂ thatÂ aÂ projectÂ withÂ maximizesÂ netÂ socialÂ benefitsÂ willÂ beÂ equivalentÂ toÂ theÂ sociallyÂ efficientÂ equilibrium.  4 
LearningÂ Objective:Â 0603Â ExplainÂ theÂ roleÂ ofÂ discountingÂ inÂ benefitcostÂ analysisÂ andÂ whyÂ theÂ socialÂ andÂ privateÂ discountÂ ratesÂ willÂ typicallyÂ differ.  5 
LearningÂ Objective:Â 0604Â ExplainÂ howÂ theÂ equityÂ andÂ theÂ distributionÂ ofÂ incomeÂ enterÂ intoÂ benefitcostÂ analysis.  4 
LearningÂ Objective:Â 0605Â DescribeÂ howÂ expectedÂ valuesÂ canÂ reflectÂ uncertaintyÂ andÂ howÂ theyÂ canÂ beÂ usedÂ inÂ benefitcostÂ analysis.  4 
LearningÂ Objective:Â 0606Â DefineÂ costÂ effectivenessÂ andÂ whenÂ itÂ isÂ usedÂ insteadÂ ofÂ benefitcostÂ analysis.  4 
c7Student: ___________________________________________________________________________
1.  Changes in productivity, healthcare costs, loss of human capital and replacement/restoration of damaged property or businesses are all examples of ________.

2.  Preventative expenditures, hedonic estimation, surrogate markets and contingent valuation are all examples of ________.

3.  It is possible to estimate ________ by considering information about reductions in worker productivity and medical expenditures.

4.  In the following figure, the producer surplus for an output level of 3 units is equal to ________.

5.  In the following figure, the producer surplus for an output level of 60 units is equal to ________.

6.  In the following figure, assume that improvements in air quality shift the marginal cost of production from MC_{1} to MC_{2}. If the producer surplus is used as an approximation of the benefits from improving environmental quality, the maximum the producers would be willing to pay for the reduction in pollution is ________ when the market price of the good is P_{1}.

7.  In the following figure, consumer surplus associated with 3 units of environmental quality is equal to ________.

8.  In the following figure, consumer surplus associated with 5 units of environmental quality is equal to ________.

9.  The amount that a person would accept in order to be compensated for a small loss in air quality is called his/her ________.

10.  Suppose public authorities were contemplating locating a hazardous waste incinerator in a particular community. If the members of this community offered to pay $25,000 to keep it out of their area, this amount is equal to their ________ for clean air.

11.  The benefits of improved environmental quality come about because of reduced damages.TrueÂ Â Â Â False 
12.  The change in consumer surplus resulting from an increase in environmental quality (a public good) can be measured in the same way as the change in consumer surplus for a private good.TrueÂ Â Â Â False 
13.  A major advantage of using contingent valuation methods is the fact that they rely on surveys.TrueÂ Â Â Â False 
14.  When people are asked willingnesstoaccept questions, their answers are usually higher than their willingnesstopay responses for the same item.TrueÂ Â Â Â False 
15.  In surveys and experimental work where people are asked to compare gains and losses relative to a reference point, they place a higher value on losses from this reference point than gains.TrueÂ Â Â Â False 
16.  Assume reductions in the amount of ground level ozone shift the marginal cost of producing alfalfa from MC_{1} = 45 + 2Q_{S} to MC_{2} = 45 + 0.5Q_{S}. Use the producer surplus to estimate the maximum amount alfalfa producers would be willing to pay for this improvement in the air quality if the market price of alfalfa is $60/unit of output. 
17.  If the inverse demand equation for a market good is equal to: P^{D} = 105 – 0.5Q^{D}. What is the consumer surplus associated with consumption of 20 units of the good? 
18.  If a policy analyst imputes marginal willingness to pay for environmental quality to be equal to: MWTP = 245 – 1.5EQ, where EQ represents a measure of environmental quality, what is the change in consumer surplus associated with an increase in EQ from 60 to 70 units? 
19.  List the four methods that can be used to impute willingness to pay for environmental improvements. 
20.  List and very briefly explain three criticisms of the travelcost method of imputing WTP for environmental amenities. 
21.  List and very briefly discuss the strengths and weaknesses of contingent valuation methods for imputing WTP for environmental amenities. 
c7 Key
1.  Changes in productivity, healthcare costs, loss of human capital and replacement/restoration of damaged property or businesses are all examples of ________.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #1Learning Objective: 0701 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.Â 
2.  Preventative expenditures, hedonic estimation, surrogate markets and contingent valuation are all examples of ________.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #2Learning Objective: 0701 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.Â 
3.  It is possible to estimate ________ by considering information about reductions in worker productivity and medical expenditures.

Accessibility: Keyboard NavigationDifficulty: ModerateField – Chapter 07 #3Learning Objective: 0701 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.Â 
4.  In the following figure, the producer surplus for an output level of 3 units is equal to ________.

Difficulty: EasyField – Chapter 07 #4Learning Objective: 0702 Explain the concept of producer surplus and how to calculate it graphically.Â 
5.  In the following figure, the producer surplus for an output level of 60 units is equal to ________.

Difficulty: EasyField – Chapter 07 #5Learning Objective: 0702 Explain the concept of producer surplus and how to calculate it graphically.Â 
6.  In the following figure, assume that improvements in air quality shift the marginal cost of production from MC_{1} to MC_{2}. If the producer surplus is used as an approximation of the benefits from improving environmental quality, the maximum the producers would be willing to pay for the reduction in pollution is ________ when the market price of the good is P_{1}.

Difficulty: EasyField – Chapter 07 #6Learning Objective: 0702 Explain the concept of producer surplus and how to calculate it graphically.Â 
7.  In the following figure, consumer surplus associated with 3 units of environmental quality is equal to ________.

Difficulty: EasyField – Chapter 07 #7Learning Objective: 0703 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.Â 
8.  In the following figure, consumer surplus associated with 5 units of environmental quality is equal to ________.

Difficulty: EasyField – Chapter 07 #8Learning Objective: 0703 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.Â 
9.  The amount that a person would accept in order to be compensated for a small loss in air quality is called his/her ________.

Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #9Learning Objective: 0705 Explain why willingness to accept estimates generally exceed those of WTP.Â 
10.  Suppose public authorities were contemplating locating a hazardous waste incinerator in a particular community. If the members of this community offered to pay $25,000 to keep it out of their area, this amount is equal to their ________ for clean air.

Accessibility: Keyboard NavigationDifficulty: ModerateField – Chapter 07 #10Learning Objective: 0705 Explain why willingness to accept estimates generally exceed those of WTP.Â 
11.  The benefits of improved environmental quality come about because of reduced damages.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #11Learning Objective: 0701 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.Â 
12.  The change in consumer surplus resulting from an increase in environmental quality (a public good) can be measured in the same way as the change in consumer surplus for a private good.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #12Learning Objective: 0703 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.Â 
13.  A major advantage of using contingent valuation methods is the fact that they rely on surveys.FALSEAlthough it is true that surveys are relatively easy to administer, they are also prone to bias since respondents will have incentives to misrepresent their true WTP for the environmental amenity. Other problems inherent with surveys include the biases of the creator of the survey questions, problems with small sample size and selfselection issues. These problems associated with the use of surveys make them a “disadvantage” of CVM. 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #13Learning Objective: 0704 Describe four methods of imputing WTP for improvements in environmental quality.Â 
14.  When people are asked willingnesstoaccept questions, their answers are usually higher than their willingnesstopay responses for the same item.TRUE 
Accessibility: Keyboard NavigationDifficulty: EasyField – Chapter 07 #14Learning Objective: 0705 Explain why willingness to accept estimates generally exceed those of WTP.Â 
15.  In surveys and experimental work where people are asked to compare gains and losses relative to a reference point, they place a higher value on losses from this reference point than gains.TRUEThis explains why WTA measures tend to be higher than WTP. 
Accessibility: Keyboard NavigationDifficulty: ModerateField – Chapter 07 #15Learning Objective: 0705 Explain why willingness to accept estimates generally exceed those of WTP.Â 
16.  Assume reductions in the amount of ground level ozone shift the marginal cost of producing alfalfa from MC_{1} = 45 + 2Q_{S} to MC_{2} = 45 + 0.5Q_{S}. Use the producer surplus to estimate the maximum amount alfalfa producers would be willing to pay for this improvement in the air quality if the market price of alfalfa is $60/unit of output.The change in producer surplus will approximate the maximum that farmers will be willing to pay for the improved air quality. Initially, output will equal 7.5 units and producer surplus is equal to:PS_{1} = Â½(60 – 45)7.5 = $56.25After the marginal cost curve shifts, output will equal 30 and producer surplus is equal to:PS_{2} = Â½(60 – 45)30 = $225The difference between PS_{2} and PS_{1} will approximate the maximum amount the farmers will be willing to spend and this equals $168.75. 
Difficulty: ModerateField – Chapter 07 #16Learning Objective: 0702 Explain the concept of producer surplus and how to calculate it graphically.Â 
17.  If the inverse demand equation for a market good is equal to: P^{D} = 105 – 0.5Q^{D}. What is the consumer surplus associated with consumption of 20 units of the good?When 20 units are consumed, the price will be $95. Consumer surplus will be equal to the area of a triangle with height 10 and width 20 which is $100. 
Difficulty: EasyField – Chapter 07 #17Learning Objective: 0703 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.Â 
18.  If a policy analyst imputes marginal willingness to pay for environmental quality to be equal to: MWTP = 245 – 1.5EQ, where EQ represents a measure of environmental quality, what is the change in consumer surplus associated with an increase in EQ from 60 to 70 units?To calculate the change in consumer surplus, we first calculate the level of consumer surplus for each level of environmental quality and then we compute the difference between them. When EQ = 60 units, MWTP = $155 and consumer surplus will be the area of a triangle with height 90 and width 60 which is equal to $2,700. When EQ = 70 units, MWTP = $140 and consumer surplus will be the area of a triangle with height 105 and width 70 which is equal to $3,675. The change in consumer surplus is therefore equal to 3,675 – 2,700 = $975. Consumer surplus increases by $975 when EQ increases from 60 to 70 units. 
Difficulty: ModerateField – Chapter 07 #18Learning Objective: 0703 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.Â 
19.  List the four methods that can be used to impute willingness to pay for environmental improvements.The four methods that can be used to impute WTP include: 1) preventative or mitigating expenditures; 2) hedonic estimation; 3) surrogate markets; and 4) contingent valuation. 
Difficulty: EasyField – Chapter 07 #19Learning Objective: 0704 Describe four methods of imputing WTP for improvements in environmental quality.Â 
20.  List and very briefly explain three criticisms of the travelcost method of imputing WTP for environmental amenities.The three main criticisms of the travelcost method include: 1) multipurpose visits: if the site in question is not the only destination or if the main purpose of the trip is not recreational, it can be difficult to accurately assess what costs of travel are actually associated with the site; 2) utility/disutility of travel: travel costs may not actually be a good proxy for WTP for the site if the trip there is either highly enjoyable or very unpleasant; and 3) survey sample bias: this method only collects data from people who actually travel to the site even though others may still derive pleasure from knowing it is there, so their WTP will be missing from final estimates. 
Difficulty: ModerateField – Chapter 07 #20Learning Objective: 0704 Describe four methods of imputing WTP for improvements in environmental quality.Â 
21.  List and very briefly discuss the strengths and weaknesses of contingent valuation methods for imputing WTP for environmental amenities.The main strength of CVM is its flexibility – the researcher has total control over what questions to ask and surveys tend to be inexpensive to administer. There are three main weaknesses of CVM including: 1) the hypothetical character of the questions: because people are being asked about their WTP for environmental amenities (i.e., goods without an actual market or price), it is hard for them to accurately assess what this actually is; 2) incentives to misstate WTP: people might understate WTP if they think this will result in lower taxes/prices for the good or they may overstate WTP since they know their actual share will be quite small; and 3) other practical problems with surveys: these could include bias of the analyst, small sample sizes; selfselection problems, etc. 
Difficulty: ModerateField – Chapter 07 #21Learning Objective: 0704 Describe four methods of imputing WTP for improvements in environmental quality.Â 
c7 Summary
Category  #Â ofÂ Questions 
Accessibility:Â KeyboardÂ Navigation  10 
Difficulty:Â Easy  14 
Difficulty:Â Moderate  7 
FieldÂ –Â ChapterÂ 07  21 
LearningÂ Objective:Â 0701Â DistinguishÂ betweenÂ directÂ andÂ indirectÂ methodsÂ ofÂ calculatingÂ theÂ WTPÂ forÂ improvementsÂ inÂ environmentalÂ quality.  4 
LearningÂ Objective:Â 0702Â ExplainÂ theÂ conceptÂ ofÂ producerÂ surplusÂ andÂ howÂ toÂ calculateÂ itÂ graphically.  4 
LearningÂ Objective:Â 0703Â ExplainÂ theÂ conceptÂ ofÂ consumerÂ surplusÂ andÂ howÂ toÂ calculateÂ itÂ graphicallyÂ forÂ aÂ marketÂ goodÂ andÂ aÂ publicÂ good.  5 
LearningÂ Objective:Â 0704Â DescribeÂ fourÂ methodsÂ ofÂ imputingÂ WTPÂ forÂ improvementsÂ inÂ environmentalÂ quality.  4 
LearningÂ Objective:Â 0705Â ExplainÂ whyÂ willingnessÂ toÂ acceptÂ estimatesÂ generallyÂ exceedÂ thoseÂ ofÂ WTP.  4 