Environmental economics practice questions.

A community forest holds 40 000 m3 of standing timber and adds 1 200 m3 of new growth each year. Which statement uses the terms natural capital and natural income correctly?

• The 40 000 m3 is natural income and the 1 200 m3 is natural capital.
• The 40 000 m3 is natural capital and the 1 200 m3 is natural income.
• Both figures are natural capital, because timber is a marketable good.
• Both figures are natural income, because the forest regenerates itself.

Answer: The 40 000 m3 is natural capital and the 1 200 m3 is natural income.

Natural capital is the stock, such as standing timber, an aquifer or a soil profile; natural income is the yield that can be taken each year without reducing that stock. Harvesting more than 1 200 m3 a year converts capital into income and is by definition unsustainable.

In a cost-benefit analysis of a coastal wetland restoration, the analyst raises the discount rate from 2 % to 8 % per year. The most likely effect on the appraisal is that

• benefits arriving in fifty years' time count for much more today
• the construction costs incurred in the first year rise substantially
• benefits arriving in fifty years' time count for much less today
• the total quantity of carbon stored by the wetland is reduced

Answer: benefits arriving in fifty years' time count for much less today

Present value falls with (1 + r) raised to the number of years, so a high discount rate shrinks distant benefits towards zero and systematically disadvantages long-lived ecosystem services. Choosing the rate is therefore a value judgement about future generations dressed up as a technical parameter.

A government ends a subsidy that had held the pump price of diesel below the cost of supplying it. Judged in the terms of environmental economics, the reform

• converts a positive externality into a negative externality
• raises the discount rate applied to damage in the distant future
• shifts the whole cost of urban air pollution from motorists onto the state
• removes a distortion that had pushed consumption above the social optimum

Answer: removes a distortion that had pushed consumption above the social optimum

Holding the price below the cost of supply makes each litre cheaper than even its private cost, let alone its social cost, so consumption and the emissions that go with it sit above the level that would maximise welfare. Removing such a subsidy raises the price towards the true cost without any new tax, which is why it is politically rather than economically difficult.

Plotting sulphur dioxide concentration against income per person across many countries produces an inverted U: it rises as a poor country industrialises, peaks, then falls as income keeps growing. A government cites this curve to argue that economic growth alone will solve its sulphur dioxide problem. The strongest objection is that

• the relationship is observed for local pollutants such as sulphur dioxide but not for carbon dioxide
• the peak occurs at an income level most countries have already passed
• the curve is drawn from one country's data over a very short period
• the downturn reflects regulation and the export of dirty industry, not growth itself

Answer: the downturn reflects regulation and the export of dirty industry, not growth itself

The falling limb is produced by policy choices and by relocating polluting production abroad, so it is neither automatic nor a reduction in the country's own footprint. The curve does fit sulphur dioxide reasonably well, so the objection is to reading it as cause rather than to the pattern itself.

A government subsidises highly efficient boilers. In the homes that install them, gas use per hour of heating falls by 30 %, but total gas consumption in those homes falls by only 12 %, while gas prices stay unchanged. The most likely explanation is that

• the subsidy was too small to change which boilers most households installed
• cheaper heating led households to heat more rooms for longer
• the efficiency figure was measured in a laboratory rather than in real homes
• gas prices fell over the same period for unrelated reasons

Answer: cheaper heating led households to heat more rooms for longer

Efficiency lowers the cost of the service, and a cheaper service is consumed in greater quantity, so part of the technical saving is taken back; this is the rebound effect. It is why efficiency standards alone rarely deliver the full modelled reduction unless a price or a cap holds total consumption down.

A village fishery has been worked by the same 40 households for generations. They set a closed season, cap the number of nets and fine members who break the rules. Standard tragedy-of-the-commons reasoning predicts collapse, yet the stock is stable. The prediction fails here because

• the resource is common property with enforced rules, not open access
• the stock happens to grow faster than the households can harvest it
• the households have other incomes and so fish only occasionally
• the fishery is too small for the tragedy of the commons to apply

Answer: the resource is common property with enforced rules, not open access

The tragedy of the commons describes open access, where nobody can exclude anyone else. A common-property regime with defined members, agreed rules and sanctions is a different institution and can be sustainable, so treating the two as the same thing is what produces the false claim that only privatisation or state control can save a shared resource.