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Name:_____________________ 
 
Pontificia Universidad Católica de Chile 
Ciencias Económicas y Administrativas Agronomía e Ingeniería Forestal 
Instituto de Economía Departamento de Economía Agraria 
 
EAE 295/AGE 305E 
 
ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS 
 
 
Test 1 
 
Name:_____________________ 
I. Multiple Choice Questions (5 points each) 
1. Will reducing pollution to zero in a particular industry be economically efficient? 
a) Never 
b) Always 
c) Yes, as long the marginal costs of pollution reduction exceed the marginal 
benefits 
d) Yes, as long as the marginal benefits of pollution reduction exceed the 
marginal costs 
e) Yes, as long as the total benefits of pollution reduction exceed the total costs 
2. What is the term for a resource that is characterized by non-exclusion and rivalry? 
a) Open-access resource 
b) Common Property resource with collective management 
c) Club Good 
d) Public Good 
e) None of the above 
3. How do ecological economists view attempts to value ecological processes? 
a) The prices used in traditional economic analyses are always too low 
b) The prices used in traditional economic analyses are always too high 
c) Prices of ecological functions should be considered to be infinite 
d) Prices imperfectly capture the complexity of ecological processes 
e) No prices should be estimated for ecological processes 
4. What is the standard economic technique used to compare present and future 
benefits and costs? 
a) Property rights 
b) Microeconomics 
c) Externalities 
d) Macroeconomics 
e) Discounting 
Name:_____________________ 
 
5. . Which one of the following is least likely to be considered a public good? 
a) An interstate highway 
b) A national park 
c) Wildlife 
d) A river 
e) A golf course 
6. If producing a good generates pollution (a negative externality), from a social 
perspective ... 
a) The price will be too low and the quantity produced will be too low 
b) The price will be too low and the quantity produced will be too high 
c) The price will be too high and the quantity produced will be too low 
d) The price will be too high and the quantity produced will be too high 
e) The price will be too low but the quantity produced will be correct 
7. What is the key to escaping the Malthusian trap? 
a) Increasing productivity per capita 
b) Increasing population 
c) Increasing natural capital 
d) Increasing population density 
e) Definition of property rights 
8. The open access equilibrium for a common property resource occurs at the point where 
a Average revenue equals marginal cost 
b) Total social benefits are maximized 
c) Total private benefits are maximized 
d) Marginal revenue equals marginal cost 
e) Marginal revenue equals total costs 
9. In a market supply and demand graph, the socially efficient outcome occurs ... 
a) Where the private marginal benefits intersect with the social marginal costs 
b) Where the private marginal benefits intersect with the private marginal costs 
c) Where the social marginal benefits intersect with the social marginal costs 
d) Where the social marginal benefits intersect with the private marginal costs 
e) Where externalities are maximized 
10. Suppose that 10,000 people are willing to spend a maximum of $20 each to preserve 
one acre of rainforest. A conservation group mails out a request to each person asking 
him or her to mail in $40 to preserve one acre of rainforest. How many acres of 
rainforest will be preserved with this program? 
a) Zero acres 
b) 1,000 acres 
c) 5,000 acres 
d) 10,000 acres 
e) There is not enough information to answer the question 
 
Name:_____________________ 
 
11. What two factors do standard economics consider as the most important in explaining 
productivity increases? 
a) Increasing energy supplies and technological progress 
b) Increasing capital stock and technological progress 
c) Increasing energy supplies and increasing natural resources 
d) Increasing capital stock and increasing energy supplies 
e) Increasing capital stock and increasing natural resources 
12. The Coase theorem states that ... 
a) Property rights should initially be assigned to those affected by a negative externality 
b) Property rights should initially be assigned to those creating a negative externality 
c) As long as property rights are well defined and no transactions costs exist, an 
efficient allocation will result 
d) As long as property rights are well defined and transactions costs are high, an 
efficient allocation will result 
e) An efficient allocation will also be equitable 
13. Which one of the following statements is true regarding the world’s food supply? 
a) As there is currently not enough food to feed the world, population growth will result 
in widespread famines 
b) Most food shortages in the future will occur in developed countries 
c) Meeting the food demand of a growing population will require an intensification of 
production 
d) Food consumption in the future will grow at about the same rate as population 
e) Future agricultural production will result in a dramatic decline in environmental 
impacts 
14. . . The “tragedy of the commons” is most likely to occur with which one of the 
following goods? 
a) A national forest 
b) A mineral ore deposit 
c) A public highway 
d) A groundwater aquifer 
E) A city park 
15. If a business generating pollution is charged a tax per unit of pollution, .... 
1) The externality still is pareto relevant 
2) The business will raise its prices and produce less of the polluting good 
3) The business will be less likely to invest in pollution-reducing technologies 
4) The business will raise its prices but produce the same quantity of the polluting 
good 
5) The business will lower its prices and produce less 
 
 
 
Name:_____________________ 
 
16. . Assuming no transactions costs, internalizing an externality will ... 
a) Increase consumer surplus but reduce producer surplus 
b) Reduce consumer surplus but increase producer surplus 
c) Increase total social costs 
d) Result in a net social loss 
e) Result in a net social gain 
17. Which one of the following statements is false? 
a) The economically optimal level of production is less than the open-access 
equilibrium level of production 
b) The economically optimal level of production occurs at the maximum sustainable 
yield 
c) Charging a license fee for access to a common resource will reduce the 
production level below the open-access equilibrium 
d) The “tragedy of the commons” is more likely to occur as production effort 
increases 
e) A license fee will reduce the incentives for entry into a market 
18. . Which one of the following statements is false? 
1) Global warming and ocean pollution are examples of global commons issues 
2) Solving problems with global commons usually requires international cooperation 
3) Problems with the global commons are becoming more prevalent as human 
economic activity increases 
4) Problems with global commons occur because countries view their global 
environmental impacts as externalities 
5) Solving problems involving global commons is not possible because of free rider 
effects 
19. Which one of the following statements about the demographic transition theory is false? 
a) Population levels are relatively stable in the first and last stages of the 
demographic transition 
b) The demographic transition theory states that death rates will decrease before 
birth rates decrease 
c) Many industrial countries have entered the third or fourth stage of the 
demographic transition 
d) The demographic transition process has occurred at very different rates in 
different parts of the world 
e) The demographic transition theory suggests that continued exponential 
population growth is possiblewith constant economic growth 
. 
 
Name:_____________________ 
 
20. Suppose a factory pollutes a river that a downstream city relies on for drinking water. 
The level of pollution is not economically efficient. Which one of the following is not a 
possible means to increase economic efficiency in this case? 
a) Government regulation requires a reduction in pollution levels 
b) The factory is taxed for each unit of pollution 
c) Property rights in pollution are clearly assigned to the factory 
d) Property rights in pollution are clearly assigned to the city 
e) The factory is required to pay increased property taxes to the city 
 
 
I. EssayQuestions (10 points each) 
1. Suppose that the domestic market for a product presents the following demand and 
supply functions: 
 
dd Pq  54 and ss Pq 2 
 
1.1 Determine the equilibrium quantity and price in a competitive market (Use Graphs) 
 
Equilibrium    
 
 
 
  ( ) 
 
 
q 
P 
S 
D 
36 
18 
Name:_____________________ 
 
1.2 The government determined that the social marginal benefit function due to a positive 
externality is: 
s
d
s
d qP 
2
1
54  
1.2.1 (5 pts) Taking this into account, determine the socially optimal equilibrium quantity 
and price. (Use Graphs) 
 
Equilibrium  
   
  
 
 
 
q 
P 
S 
D 
54 
D
s 
27 
Name:_____________________ 
 
 
1.2.2 (10 pts) Estimate the social cost associated with this externality. 
 
 
 
 
The social cost is given by area “a”. This area is equivalent to ( )( ) 
 . 
 
 
 
2. Assume that a small town uses a referendum to overcome the free-ridership 
problem and determine how its residents might value a new water filtration system 
for its public water supply. The voting results are aggregated by the town’s two 
districts, yielding the following demand estimates: 
 
 District 1: Q = 80 – 10P1 
 District 2: Q = 12 –P2, 
 
where Q is the expected percent of copper to be filtered by the system and P is the 
price in millions of dollars. 
 
a. Based on these estimates, determine the town’s market demand for this public good, 
the new filtration system (show your results graphically). 
 
q 
P 
S 
D 
 
D
s 
36 
a 
54 
18 
36 
Name:_____________________ 
 
Because this is a public good, the two demands must first be written in inverse form 
and then summed. The reasoning is that, for a public good, each demander is 
expressing a willingness to pay for the same quantity. The inverse demand 
equations are: 
 
 District 1: P1 = 8 – 0,1Q 
 District 2: P2 = 12 – Q, 
 
 
Graphically: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
b. If the market supply for the system were P = 6 + 0.15Q, what would be the 
equilibrium price and quantity for the town? 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equate the market demand and market supply and solve, as follows: 
 
 
Q 
P 
8 
12 
80 12 
20 
P = 20 – 1,1Q  Q ≤ 12 
P = 8– 0,1Q  12 ≤ Q ≤ 80 
Q 
P 
6 
80 Q* 
20 
Supply 
P* 
Name:_____________________ 
 
 
20 – 1,1Q = 6 + 0.15Q  Q* = 11,2  P* = 7,68