economic guide questions

EC 230: Topics in Environmental Economics

Department of Economics, University of Vermont

Donna Ramirez Harrington

([email protected])

GUIDE QUESTIONS

Type your answers below the empty space provided (you may use more space of course) using BLUE in CALIBRI FONT: Then upload on designated portal on our course Bb on the date indicated.

Note we have two different due dates for submission.

These three readings all relate to economic growth-pollution relationship, but from a macroeconomic standpoint. This is how the readings and labs are related to each other and to other modules:

1. The first HW due on this topic is for Pugel and Dasgupta together. Pugel reading (pages 284-288) provides the background on the relationship between economic growth and pollution, the components of those relationships, the shape of the traditional EKC and what it means. Dasgupta discusses the how the shape of the EKC can be different from the traditional EKC and the interventions needed to modify the shape. Note that these interventions relate to different types of regulations/interventions that we have discussed (standards, taxes, permits, VIBAs)

2. For EKC Lab 1: we will be estimating the turning point of the EKC: i.e., what level of GDP per capita will EKC start to slope down. The second HW due will be the Excel file that you did to re-create EKC Lab 1 results.

3. The third HW due date is for Cole which extends the EKC to incorporate trade. It is this inclusion of trade variables that will allow us to relate the EKC (the composition effect - see Pugel reading below) to pollution haven hypothesis (Dechezleprêtre and Sato reading). Note that the income effect (see below) is what relates EKC to regulation which is the topic in an earlier module). Note that Cole explains how inclusion of trade variables will affect the turning point of the EKC. Once again, our modules and concepts therein are inter-related and their linkages will get clearer as we go along.

4. For EKC Lab 2: we will be analyzing whether the coefficients of the trade variables are as expected based from Cole, and estimate whether the turning point of the EKC in models with trade variables will behave as they did in the Cole paper. The fourth HW due date will be the Excel file that you did to re-create this EKC Lab 2 results.

Before you get started on the readings watch these:

https://www.youtube.com/watch?v=v-USvMNPNKM

https://www.youtube.com/watch?v=RXw_X9L_4TQ

PUGEL and DASGUPTA ET AL

Save and post your answers as: YOURFAMILYNAME_PugelDasgupta.doc

PUGEL

Focus on pages 284-288 for Pugel

1. Define the three possible shapes of the pollution-economic growth relationship [ /5]

No need to submit now: but you need to be able to draw each one.

2. Define what EKC stands for and describe what it captures. Which ones of the shapes above correspond to the EKC. [ /5]

3. Describe the three “effects” of economic growth on pollution [ /15] 

For each, identify and explain the signs (+ or – or could be either + or -); Positive (Negative) means that as growth increases, pollution increases (decrease).

a. Size effect

b. Composition effect

c. Income effect

4. Then discuss how the relative sizes of these effects determine where an economy is on the EKC [ /10]

DASGUPTA ET AL

1. What are the possible modified shapes of the EKC according to Dasgupta and why they are “better” or “worse” than a traditional EKC discussed in Pugel [ /15]

2. How does Dasgupta propose we achieve the “more optimistic” shape of the EKC.  [ /15]

Many of them are related to the different types of regulations/interventions that we have discussed (standards, taxes, permits, VIBAs). So identify which policy instruments are implied by each of Dasgupta’s recommendations as you describe each one.

COLE

Save and post your answers as:YOURFAMILYNAME_Cole.doc

1. Summarize how and why trade and pollution haven hypothesis (focus of the DS reading) is related to the concept of EKC (Section1 and Section 2, you can focus on Section 2 until the top of second column of page 74 and then read all of section 3) [ /10]

2. For EKC Lab 2, we will focus on variables similar to DX and DM in Equation 3 Section 3 of Cole. Explain what each of these variable capture in relation to the pollution haven hypothesis and explain how each is expected to affect pollution, i.e., thee expected sign of their coefficients, , respectively. [ /15]

Tip: I pasted Tables 1 and 2 at the end of this document with some notes to help you answer the questions.

Tip: Make sure you understand this as this will be what we will discuss in EKC Lab 2 and Quiz 4.

3. There are two sets of results in Section 3: one for air (Table 1) and one for water (Table 2).

Summarize whether the signs of the coefficients of the variables DX and DM are in each equation and discuss whether they are consistent with the hypotheses you discussed above. (those indicated inside the red box in Tables 1 and 2 at the end of this document) [ /30]

Tip: I pasted Tables 1 and 2 at the end of this document with some notes to help you answer the questions.

Tip: Make sure you understand this as this will be what we will discuss in EKC Lab 2 and Quiz 4.

4. The most important part of section 3 that I want us to focus on are whether the inclusion of the trade variables will change the turning point of EKC (those indicated inside the blue box in Tables 1 and 2 at the end of this document). Page 78 has the explanation of how their inclusion is expected to change the turning point (higher or lower) and why. Explain in your own word how and why inclusion of the trade variables in estimating EKCs can change the turning point. [ /10]

The tables show the coefficients of the variables in the model:

For both Tables 1 and 2:

· The green boxes show the coefficients Y variables, log(GDPpercapita) variables. The coefficients of the linear, quadratic and cubic terms are , and , respectively

· The red boxes show the structural and trade variables that will allow us to test the pollution haven hypothesis. Pay attention to what the text says the signs of their coefficients are ( and whether the results above are consistent with the hypothesis.

· The blue box shows the turning points, i.e, the level of ln(GDPpercapita) that makes EKC turn and slope downward. That is makes the slope of E with respect to Y zero. For the quadratic models (NOx, SO2, SPM and CO2), it should be equal to the exp [Yhat]= exp[- / (2 * )]. We need to take exp[Yhat] because GDPpercapita is in natural log.

For Table 1 only: the orange box is the results for CO2. We will be using CO2 data for our lab but it is different from this dataset since I do not have access to Cole’s detailed data. I only have country-level data from the WB every five years from 1990-2010 every so our turning point will be very different.

For both Tables 1 and 2:

· The green boxes show the coefficients Y variables, log(GDPpercapita) variables. The coefficients of the linear, quadratic and cubic terms are , and , respectively

· The red boxes show the structural and trade variables that will allow us to test the pollution haven hypothesis. Pay attention to what the text says the signs of their coefficients are ( and whether the results above are consistent with the hypothesis.

· The blue box shows the turning points, i.e, the level of ln(GDPpercapita) that makes EKC turn and slope downward. That is makes the slope of E with respect to Y zero. For the quadratic models (NOx, SO2, SPM and CO2), it should be equal to the exp [Yhat]= exp[- / (2 * )]. We need to take exp[Yhat] because GDPpercapita is in natural log.

Calculating the Turning points of GDP in a quadratic model:

http://www.sterndavidi.com/Publications/EKC.pdf

How to get from (1) to (2):

Take derivative of (1) with respect to ln(GDP/P) (the first derivative is like taking the slope)

It is equal to beta_1+2*beta2 * ln (GDP/P) (1’)

Equate (3) to zero (slope of ln(E/P) is zero at its peak)

beta_1+2*beta2 * ln (GDP/P)=0 (1’’)

Solve (1’’) for ln (GDP/P) yields (2).

Note on turning points:

The calculated turning point is descriptive not prescriptive:

Descriptive: It tells us that given the data (geographic region covered and time period), that was the GDP per capita level where pollution stats to fall

Not prescriptive: The turning point DOES NOT say that we need to wait until countries get to that level of per capita income before economic growth (GDP per capita) can start yielding lower pollution . The turning point DOES NOT imply that poor countries need to suffer the pollution as cost of economic growth.

That is why Dasgupta’s article is important: It tells us the intervention we need to do to make the turning point level of income lower and the peak level of pollution lower