BROCK UNIVERSITY - DEPARTMENT OF ECONOMICS

Economics 2P28 : Economics of the Environment

ANSWER KEY TO ASSIGNMENT #1

Handed out: 13 September 2001 Due : IN CLASS, 27 September 2001

1. (6 marks) In August 2000 the government of Ontario announced the new Drinking Water Protection Regulation that gave the Ontario Drinking Water Standards the force of law. Under the regulation, large water works in Ontario have certain rules to follow to ensure potable drinking water. Evidence of non-compliance is subject to legal penalties. The rules include:

• Requirements for waterworks to take regular and frequent samples of treated water and to undertake specific sample tests for a number of microbiological parameters, chlorine residuals, turbidity, volatile organics, and other types of elements present in drinking water. In all there are 84 different standards covering such things as: the allowable concentrations of cyanide, trihalomethanes, and chloramines. Testing is to be done in accredited labs and reported to the Ministry of the Environment.
• By December 2002 all drinking water intended for distribution must be disinfected by chlorination or an equivalent process.
• Quarterly reports must be made available to the public describing basic system and water source information and summarizing testing results.
• Public authorities must be notified in the even that water does not meet the standards.

3. (4 marks) There is no information for Walkerton because the Drinking Water Surveillance Program did not cover all municipal water utility providers. Only 126 water utilities were monitored for 1997. Water supply systems were included in the program according to the population served, the anticipated exposure and risk of contamination, the geographical location, and the availability of laboratory capacity. One must assume that Walkerton with its small population base, was not considered for inclusion in the program, in spite of the high risk of contamination due to its geographical location in the agricultural heartland of Ontario.
4. (10 marks) Three types of costs associated with providing potable (good quality) drinking water include:

• costs of withdrawing the water from its source (usually this involves pipes, electricity, etc.)
• treatment and purification costs
• transportation costs
• treatment of sewage returned to receiving water body, etc.

• individual benefits to consumers in the form of a reduction in the risks of being subject to gastro-intestinal upsets
• individual benefits in the form of a reduction in the risk of death associated with drinking poor quality water
• social benefits in the form of reduced demand on health care resources
• time savings (your best alternative might be to collect your own water)

1. (12 marks)

Pollutant/Sector (%)	First	Second	Third
Nitrogen Oxides	Road vehicles (37%)	Other Transportation (26%)	Power Utilities (14%)
Sulphur Dioxide	Smelters (42 %)	Power Utilities (20%)	Area Sources (12 %)
Carbon Monoxide	Road Vehicles (50%)	Primary Metals Processing (22%)	Other Transportation (18%)

 

2. (6 marks)

Nitrogen oxides are known to irritate lungs and lower resistance to respiratory infection.

Sulphur dioxide is responsible for worsening respiratory problems, possibly leading to cardiovascular disease. It is also implicated as a potential cause in climate change which may lead to an increased incidence of skin cancers, etc.

Carbon monoxide reduces oxygen delivery to organs. Ultimately, vision may be impaired, as well as learning ability.

3. ( 6 marks) The sectors that create these types of pollutants are very important to economic activity, as we know it. For example, power generation makes it possible for us to live in a cold climate. Smelters enable us to have products such as automobiles. Transportation allows us to live in one area and work in another.
4. (6 marks) No, the optimal allocation of resources is determined by equating the marginal benefit with the marginal cost. (This is what your text calls the first equimarginal principle and what I identified in class as leading to a maximization of net benefits.) This is what determines a good policy. There are many positive flows associated with the sectors that also emit sulphur dioxide. For example, smelters and power generation create goods and services that are central to our lifestyles, e.g., basic shelter and means to pursue employment. These all represent positive flows of goods and services that greatly increase our quality of life. However, there are negative aspects associated with pollution emissions, including damages to lungs, hearts, vision, etc. For society as a whole, at a zero amount of pollution, the marginal benefit (value of the positive flows) of having some pollution is greater than the marginal cost (value of the negative flows) of having the pollution. Thus, some positive amount of pollution is optimal.

1. ( 4 marks ) Static efficiency occurs when the net benefit has been found. Alternatively, this can be re-expressed as occurring when the marginal benefit equals the marginal cost. This is found by equating the demand and supply functions and solving for Q* (efficient allocation) = 40 (Set P (=80-Q) equal to MC=1Q) and solve for: 2Q = 80 or Q =40.
2. ( 3 marks) Total cost is area under supply curve or the area of the triangle (1/2 times base times height) = 1/2 x 40x40 = $800

Total benefit equals area under demand curve or the sum of the areas of the triangle and the rectangle = (1/2 x 40*40) + 40x40 = $800 + $1600 = $2400

So, the net benefit is $1600.

3. (8 marks) The present value of the benefits contains only one item - the $20,000 discounted back five periods found as: 20000/(1.05)⁵ = 20000/1.276 = 15670.52. The present value of costs contains five items as follows: