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Name:_____________________ 
 
Pontificia Universidad Católica de Chile 
Ciencias Económicas y Administrativas 
Instituto de Economía 
 
EAE 295 
 
ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS 
 
 
Test 1 
 
Multiple Choice Questions (1 pt 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. Jevon´s equimarginality principle to reach socially optimal intertemporal allocation of resources 
over time is 
a) Net present value of future benefits must be greater than zero. 
b) The present value of net benefits at time t, must equal the present value of net marginal 
benefits at time t+1,  t 
c) Present value of marginal benefits must be equal to present value of marginal costs. 
d) The present value of marginal benefits at time t, must equal the present value of 
marginal benefits at time t+1,  t 
e) None of the above. 
 
3. In a society with heterogeneous preferences for public good 
a) Everyone consumes the same amount 
b) Individuals with a higher willingness to pay consume a greater proportion. 
c) Present the same welfare gains. 
d) All of the above. 
e) None of the above. 
 
 
Name:_____________________ 
 
4. The “tragedy of the commons” is most likely to occur with which one of the following goods? 
a) A forest stand of the Woody Woodpecker firm. 
b) A government owned mineral ore deposit 
c) A public highway 
d) A groundwater aquifer 
e) Water quality 
 
5. Which one of the following statements is false? 
a) Market failures are not important for environmental economics since these are not traded 
in a market. 
b) Producers extract more than the social optimum amount when discount rates are very 
high. 
c) Common property problems are due to the lack of solid operational rules between users. 
d) All of the above. 
e) None of the above. 
 
6. An efficient allocation of resources is not reached with tradable rights due to 
a) Presence of Free riders. 
b) Presence of holdout effect. 
c) High negotiation costs. 
d) All of the above. 
e) None of the above. 
 
7. Which one of the following statements about sustainable development is false? 
a) Some people have complained that sustainable development is a term devoid of 
specific content 
b) Some people consider sustainable development just a slightly modified form of 
traditional economic growth 
c) Sustainable development should provide for human needs without undermining the 
global ecosystem 
d) Sustainable development would redefine economic goals 
e) Sustainable development will require increased resource consumption 
 
Name:_____________________ 
 
8. Which one of the following is not an example of a cumulative pollutant? 
a) Nuclear wastes 
b) Chlorofluorocarbons (CFC’s) 
c) DDT 
d) Carbon monoxide 
e) Toxic wastes 
 
9. According to Simon 
a) Actual economic growth will reach limits. 
b) The resource that may limit growth is a low capacity of human innovation 
c) There is nothing to worry about in the future. 
d) All of the above 
e) None of the above. 
 
10. Environmental taxes sometimes do not improve the environment 
a) When the tax rate is set at high levels 
b) When demand is very inelastic. 
c) Since those with greater resources prefer to pay than to invest in quality 
control. 
d) All of the above. 
e) None of the above. 
 
11. In order to achieve a society that develops sustainably, 
a) Analysis based on both ecological and standard environmental economics is required 
b) Environmental economic analysis is ineffective 
c) The global macroeconomic scale must be increased 
d) Attempts to economically value natural resources must be avoided 
e) Property rights must be assigned for all natural resources 
 
12. The environmental impact equation defines impacts as a function of which three variables? 
a) Solar energy, population, and natural resources 
b) Technology, affluence, and population 
c) Natural capital, human capital, and physical capital 
d) Affluence, population, and energy use 
e) Population, technology, and energy use 
 
 
Name:_____________________ 
 
13. Assuming economic efficiency is maximized, when will more of a resource tend to be 
used in the first time period (as compared to future time periods)? 
f) Whenever the discount rate is positive 
g) Whenever the marginal net benefits in the present are positive 
h) Whenever the discount rate is zero 
i) Whenever the user costs are positive in the present 
j) Whenever the marginal net benefits in the future are negative 
 
14. What does the Coase theorem say about equity? 
a) An equitable outcome will occur whenever property rights are well defined 
b) An equitable outcome will occur whenever transactions costs are zero 
c) An equitable outcome will occur whenever those affected by an externality have the 
property rights 
d) An equitable outcome will occur as long as an efficient outcome is achieved 
e) Nothing 
 
15. Which one of the following statements is false? 
a) The source function is generally excluded from the standard circular flow model 
b) The sink function is generally excluded from the standard circular flow model 
c) Human activity can degrade the source function of the environment 
d) No economic techniques have been developed to value the source and sink functions 
e) Human activity can degrade the benefits provided by the sink function of the 
environment 
 
16. Costs imposed on future users of a resource are called 
a) Transactions costs 
b) Social costs 
c) Private costs 
d) Depletion costs 
e) User costs 
 
17. A socially optimum environmental quality can be determined by 
a) Benefit - cost analysis 
b) Estimating society’s maximum willingness to pay 
c) Determining society’s net welfare 
d) All of the above 
e) None of the above 
Name:_____________________ 
 
 
18. Which of the following is true 
a) Population growth retards economic growth 
b) Kuznet postulated that the relationship between economic growth and environmental 
quality is an inverted U 
c) Population growth is the major problem that humanity faces 
d) All of the above 
e) None of the above 
 
19. Hotelling’s rule states that a non-renewable net price path over time 
a) Increases exponentially 
b) Increases at a rate equal to the interest rate 
c) Does not follow a monotonic trend 
d) All of the above 
e) None of the above 
 
20. 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 possible with constant economic growth 
 
Name:_____________________ 
 
 
II Exercises 
 
1. (20 points) Suppose you have a nonrenewable resource with a finite stock of 35 units, 
constant marginal extraction costs of 2.0, a discount rate of 10%, and constant demand given 
by the inverse demand function: 
 
p = 10 - 0.5q 
 
 
a) (5 points) How much extraction represents a dynamically efficient solution? 
 
 
Net marginal benefits: 
 
pi = 8 - 0.5qi  i = 1,2 
 
Optimal extraction over time: 
 
8 − 0.5𝑞1 = 
8 − 0.5𝑞2
1.1
 
𝑞1 + 𝑞2 = 35Solving these equations  
 
8 − 0.5(35 − 𝑞2) = 
8 − 0.5𝑞2
1.1
 
 
(𝑞1, 𝑞2) = (17.34,17.65) 
 
These results are counterintuitive since a positive discount rate implies that present consumption is 
preferred and thus𝑞1 ≥ 𝑞2. 
 
Analyzing the problem graphically we see that 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8 
7.27 
16 16 
MgNB1 PVMgNB2 
Name:_____________________ 
 
 
Thus the resource is not scarce and optimal extraction is 
 
(𝑞1, 𝑞2) = (16,16) 
 
 
b) (5 points) Which is the value of marginal user costs in time period 1 and 2? 
 
 
Since resource is not scarce and todays extraction does not affect tomorrows extraction 
 
 
𝑀𝑈𝐶1 = 𝑀𝑈𝐶2 = 0 
 
 
 
 
c) (10 points) Suppose that the discount rate increases to 20%, how much does 
• q1, extraction in period one 
• q2, extraction in period two 
• MUC1, marginal user cost in period one 
• MUC2, marginal user cost in period two. 
 
change? You should answer the question also through the use of carefully-labeled graphs and 
by explaining carefully the complete intuition behind your answers. 
 
 
 
Given that discount rate does not affect optimal extraction over time, since resource is not scarce, an 
increase in the discount rate has no effect on q1, extraction in period on q1, q2, MUC1, MUC2. 
 
 
 
 
2. (20 points) Suppose that there are three types of people in a society. The difference between 
them is that their preferences for a public good are different. Each type’s preferences are 
a. Q1= 0.04 - 0.0005 P 
b. Q2= 0.025 - 0.0005 P 
c. Q3= 0.015 - 0.0005 P 
 
In this society there are 1,000 type 1 individuals, 3,000 type 2, and 2000 type 3. 
 
a) (5 points) Calculate aggregate demand function for this public good. (Use graphs to 
explain your results) 
 
 
Since this is a public good, we must vertically sum the individual demands. The individual inverse 
demands are: 
 
𝑝 = 80 − 2000𝑄1 
Name:_____________________ 
 
𝑝 = 50 − 2000𝑄2 
𝑝 = 30 − 2000𝑄3 
 
Aggregate demand for each group is 
 
𝑝 = (80 − 2,000𝑄1) ∗ 1000 = 80,000 − 2,000,000𝑄1 
𝑝 = (50 − 2000𝑄2) ∗ 3000 = 150,000 − 6,000,000𝑄2 
𝑝 = (30 − 2000𝑄3) ∗ 2000 = 60,000 − 4,000,000𝑄3 
 
 
Graphically 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
80.000 
150.000 
3.0000
00 
0.04 0.025 0.015 
230.000 
Q* 
60.000 
290.000 
0.0175 
Name:_____________________ 
 
b) (5 points) If the marginal cost of supplying the good is constant and equal to $3,000, how 
much of this public good be supplied? 
 
 
The optimal supply is determined where aggregate demand = MC 
 
At MC = 3.000 Aggregate demand is 
 
80,000 − 2,000,000𝑄 0.025 ≤ 𝑄 ≤ 0.04 
 
Thus: 
 
80,000 − 2,000,000𝑄1 = 3.000 
 
𝑄∗ = 0.0385 
 
 
 
c) (10 points) How much is society’s economic welfare and net gain? How do they compare? 
 
Society’s welfare is 
 
𝑊 = 𝑎 + 𝑏 + 𝑐 + 𝑑 + 𝑒 = 3,925 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Society’s net gain is Welfare – Cost = 3,925 − (0.0385)(3,000) = 3,809.5 
0.04 0.025 0.015 
290.000 
a 
b 
c 
d 
e 
30.000 
110.000 
𝑎 =
(180000)(0.015)
2
= 1,350 
𝑏 = (80000)(0.015) = 1,200 
𝑐 = (30000)(0.025) = 750 
𝑑 =
(80000)(0.01)
2
= 400 
𝑒 =
(30000)(0.015)
2
= 225