BECE-143:ENVIRONMENTAL ECONOMICS solved assignment

 BECE-143:ENVIRONMENTAL ECONOMICS

1) What are Public Goods? Explain their features with the help of examples. Is the efficient provision of a public good different than the efficient provision of a private good? Explain your response with the help of appropriate diagrams. 

Ans.

Definition of Public Goods

Public goods are goods or services that are non-excludable and non-rivalrous, meaning they can be consumed by everyone without reducing their availability to others. These goods are typically provided by the government because the private sector lacks incentives to produce them efficiently.

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2. Features of Public Goods

a) Non-Excludability

• No one can be prevented from using the good, even if they do not pay for it.
• Example: Street lighting – Once installed, everyone benefits, whether they pay taxes or not.

b) Non-Rivalry

• One person’s use of the good does not reduce its availability to others.
• Example: National defense – Protecting one citizen does not reduce protection for others.

c) Free-Rider Problem

• Since people cannot be excluded, some may benefit without paying.
• This leads to under-provision of the good if left to private markets.
• Example: Public parks – If no one paid taxes, parks would not be maintained.

d) Provided by the Government

• Due to market failure (free-rider problem), public goods are financed through taxes and provided by governments or international organizations.
• Example: Road infrastructure – Government collects tolls or taxes to fund maintenance.

 Efficient Provision of Public Goods vs. Private Goods

a) Efficient Provision of Private Goods

• In private markets, efficiency is achieved where marginal cost (MC) = marginal benefit (MB).
• Diagram:
• The demand curve represents individual willingness to pay.
• The supply curve represents the marginal cost of production.
• Equilibrium is where supply = demand.
• Example: In the market for apples, the efficient quantity is produced where MC = MB.

b) Efficient Provision of Public Goods

• Since public goods are non-rivalrous, the total benefit is the sum of all individual benefits.
• Diagram:
• The social demand curve is obtained by vertically summing individual demand curves.
• The efficient quantity is where social marginal benefit (SMB) = marginal cost (MC).
• Example: The government provides national defense based on the total willingness to pay of all citizens.

 2) Discuss the Coase Theorem. How does it work? Explain with examples. Are there any limitations of Coasian bargaining? Support your answer with examples. 

Ans.

 Introduction to the Coase Theorem

The Coase Theorem, developed by Ronald Coase (1960), states that if property rights are well-defined and transaction costs are low, private parties can negotiate and reach an efficient solution to externalities without government intervention.

Key Idea:

• When externalities exist (such as pollution), affected parties can bargain to resolve the issue efficiently.
• Government regulation is not always necessary to correct market failures if bargaining is possible.

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The Coase Theorem Work

a) Key Assumptions:

1. Property rights are well-defined – Ownership and responsibility are clear.
2. Low or zero transaction costs – Negotiation, enforcement, and monitoring costs are minimal.
3. Small number of parties involved – Fewer stakeholders make bargaining easier.

b) Process of Coasian Bargaining

1. The party causing the externality and the affected party negotiate.
2. The cost-benefit trade-off determines the optimal level of externality.
3. Mutually beneficial agreement leads to efficiency.

Example 1: Factory Pollution and Fishermen

• A factory pollutes a river, harming local fishermen.
• Two possible scenarios:
• Factory has the right to pollute → Fishermen pay the factory to reduce pollution.
• Fishermen have the right to clean water → Factory pays the fishermen to allow some pollution.
• Regardless of who has the rights, negotiation leads to an efficient outcome.

Limitations of Coasian Bargaining

a) High Transaction Costs

• Real-world negotiations involve legal fees, time costs, monitoring expenses, and bargaining failures.
• Example: A large city affected by industrial pollution cannot efficiently negotiate with multiple factories due to high costs.

b) Coordination Problems (Many Affected Parties)

• If many people are affected, bargaining becomes complex.
• Example: Global climate change – Millions of people are impacted, making negotiations difficult.

c) Unequal Bargaining Power

• Powerful firms or wealthy individuals may exploit weaker parties.
• Example: A poor village negotiating with a multinational corporation over land use may lack bargaining power.

d) Difficulty in Defining Property Rights

• Some externalities involve intangible rights, making negotiation impossible.

Example: Air pollution 

3) Distinguish between Willingness to Pay and Willingness to Accept. 

Ans.

Aspect	Willingness to Pay (WTP)	Willingness to Accept (WTA)
Definition	Maximum amount a person is willing to pay for a good or service.	Minimum amount a person demands to give up a good or endure a loss.
Perspective	Consumer’s viewpoint (buying decision).	Seller’s or owner's viewpoint (compensation for loss).
Example	A person is willing to pay $10 for a cup of coffee.	A café owner demands at least $15 to sell a cup of coffee.
Market Behavior	Reflects demand in a market.	Reflects supply or compensation for giving up an asset.
Property Rights	Buyer does not own the good yet.	Seller already owns the good.
Influencing Factors	Income, preferences, necessity of the good.	Emotional attachment, availability of substitutes, perceived value.
Typical Comparison	WTP is usually lower than WTA.	WTA is usually higher than WTP due to loss aversion (endowment effect).
Economic Implication	Used in cost-benefit analysis, pricing strategies.	Important in compensation claims, environmental damage valuation.

4) What do you understand by the term ‘sustainable development’? Explain any two perspectives on sustainable development. 

Ans.

Sustainable development refers to economic growth and development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. It balances three key dimensions:

1. Economic Growth – Ensuring long-term prosperity.
2. Environmental Protection – Conserving natural resources.
3. Social Equity – Promoting fairness and well-being for all.

Perspectives on Sustainable Development

There are multiple perspectives on how sustainable development should be achieved. Two important ones are:

A) Environmental Perspective

• This view prioritizes environmental conservation over economic growth.
• It argues that economic activities must operate within ecological limits to prevent issues like climate change, deforestation, and biodiversity loss.
• Policies under this perspective include:
• Renewable energy adoption (e.g., solar, wind).
• Reducing carbon emissions (e.g., carbon taxes, emission caps).
• Conservation of forests and marine ecosystems.
• Example: The Paris Agreement (2015) aims to reduce global carbon emissions to mitigate climate change.

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B) Economic Perspective

• This approach believes that economic growth and technological advancements can solve sustainability challenges.
• It emphasizes green technology, innovation, and sustainable industrial practices.
• Sustainable development is seen as an opportunity for economic expansion through:
• Investing in eco-friendly technologies (e.g., electric vehicles, circular economy).
• Corporate sustainability initiatives (e.g., ESG investing).
• Sustainable urban development (e.g., smart cities, green buildings).
• Example: The rise of Green Energy Companies (e.g., Tesla, Ørsted) that combine profitability with sustainability.

 5) How does Command and Control Approach(CAC)approach work? Discuss its advantages.

Ans.

CAC Work

• Governments impose direct regulations on industries, companies, and individuals to reduce environmental harm.
• Regulatory agencies (e.g., EPA, CPCB) monitor compliance and enforce penalties for violations.
• The approach is often used for controlling pollution, resource usage, and conservation efforts.

. Advantages of CAC Approach

✅ 1. Ensures Compliance & Effectiveness

• Legally binding rules force firms to comply, reducing environmental damage.
• Example: Banning lead in gasoline significantly improved air quality.

✅ 2. Provides Clear Guidelines

• Companies and industries get specific targets, reducing uncertainty.
• Example: The Montreal Protocol (1987) successfully reduced CFC emissions to protect the ozone layer.

✅ 3. Quick Implementation

• Compared to market-based solutions (like carbon taxes), CAC directly enforces rules without waiting for market adjustments.
• Example: China's industrial pollution limits forced industries to adopt cleaner technologies immediately.

✅ 4. Protects Public Health & Environment

• Strict pollution controls reduce respiratory diseases, water contamination, and ecosystem destruction.

Example: River Ganga Action Plan in India aimed at reducing industrial wastewater pollution.

 6) Differentiate between: 

(a) Efficiency in production and efficiency in consumption 

Ans.

Aspect	Efficiency in Production	Efficiency in Consumption
Definition	Producing goods at the lowest possible cost.	Allocating goods to maximize consumer satisfaction.
Focus	Firms, industries, and production processes.	Households, consumers, and market allocation.
Condition	No more of one good can be produced without reducing another.	Consumers maximize their utility given their budget.
Economic Concept	Productive Efficiency	Allocative Efficiency
Example	A factory producing at minimum cost.	Consumers buying goods that provide the most value to them.

(b) Stated preference and revealed preference methods of evaluating environmental resources 

Ans.

Aspect	Stated Preference	Revealed Preference
Data Source	Hypothetical surveys	Actual market behavior
Measures	Both use & non-use values	Only use values
Examples	Contingent valuation, choice experiments	Hedonic pricing, travel cost method
Bias Risk	Higher (hypothetical bias)	Lower (real-world choices)
Use Case	Valuing endangered species, air quality, biodiversity	Valuing recreational areas, property value impacts

(c) Use value and non-use value of environmental services 

Ans.

Environmental services provide economic and ecological benefits that can be classified into use values and non-use values. These categories help economists assess the total economic value (TEV) of natural resources.

Aspect	Use Value	Non-Use Value
Definition	Benefits from direct or indirect use of resources.	Benefits from knowing a resource exists, without using it.
Types	Direct use, indirect use, option value.	Existence, bequest, altruistic values.
Example	Drinking water, fishing, tourism.	Protecting endangered species, conserving forests for future generations.
Market Relation	Often linked to markets (e.g., eco-tourism, timber trade).	Mostly outside markets (valued through surveys, conservation efforts).

7) Write short notes on the following: 

(a) PigouvianTax 

Ans.

Pigouvian Tax

Definition:

A Pigouvian tax is a tax imposed on activities that generate negative externalities, such as pollution, to correct market inefficiencies. It is named after economist Arthur Cecil Pigou, who introduced the concept in his work on externalities.

Purpose:

• Internalizes external costs by making polluters pay for the damage they cause.
• Encourages firms and individuals to reduce harmful activities (e.g., emissions, plastic waste).

Examples:

• Carbon tax on fossil fuel emissions to combat climate change.
• Cigarette tax to discourage smoking and reduce public health costs.
• Plastic bag tax to minimize plastic waste and pollution.

Advantages:

✅ Provides economic incentives for pollution reduction.
✅ Encourages firms to adopt cleaner technologies.
✅ Generates government revenue for environmental programs.

Disadvantages:

❌ Difficult to accurately measure the external cost.
❌ May increase production costs and affect businesses.
❌ Can be regressive, affecting low-income groups more.

 

(b) Stocks and flows of economic assets 

Ans.

Economic assets are classified into stocks and flows based on how they are measured over time.

• Stock: A quantity measured at a specific point in time (e.g., total wealth, capital stock).
• Flow: A quantity measured over a period of time (e.g., income, investment).

. Examples in Economics:

• Stock Variables: National wealth, foreign exchange reserves, unemployment level.
• Flow Variables: GDP, savings per month, government budget deficit.

Importance:

• Stock variables affect future flows (e.g., capital stock influences future production).
• Flow variables contribute to stock changes (e.g., investment increases capital stock).

(c) Travel cost method

Ans.

Travel Cost Method (TCM)

Definition:

The Travel Cost Method (TCM) is a revealed preference technique used to estimate the economic value of recreational sites (e.g., national parks, beaches) by analyzing how much visitors spend to reach them.

Working:

• Assumes that time and travel expenses reflect the site's value.
• Surveys visitors about travel costs, entry fees, and visit frequency.
• Uses this data to estimate demand and willingness to pay for the site.

Types of TCM:

1. Zonal TCM – Groups visitors by geographical zones and compares visit rates.
2. Individual TCM – Collects detailed travel cost data from each visitor.

Examples:

• Estimating the value of Yosemite National Park by analyzing tourists' travel expenses.
• Assessing the economic benefits of a beach based on visitor spending.