7

7
Student: ___________________________________________________________________________
1. Changes in productivity, health-care costs, loss of human capital and replacement/restoration of damaged
property or businesses are all examples of ________.
A. indirect approaches of cost estimation
B. indirect approaches of benefit estimation
C. direct approaches of cost estimation
D. direct approaches of benefit estimation
2. Preventative expenditures, hedonic estimation, surrogate markets and contingent valuation are all
examples of ________.
3. It is possible to estimate ________ by considering information about reductions in worker productivity
and medical expenditures.
A. demand for health care
B. health damages
C. output losses
D. willingness to pay for hospitals
4. In the following figure, the producer surplus for an output level of 3 units is equal to ________.
A. $7.50
B. $5.25
C. $4.50
D. $2.25
A. $900
B. $1,800
C. $2,100
D. $3,000
6. In the following figure, assume that improvements in air quality shift the marginal cost of production
from MC1 to MC2. If the producer surplus is used as an approximation of the benefits from improving
environmental quality, the maximum the producers would be willing to pay for the reduction in pollution
is ________ when the market price of the good is P1.
A. area E
B. areas E + D + C
C. areas D + C
D. area B + D
7. In the following figure, consumer surplus associated with 3 units of environmental quality is equal to
________.
A. $4.50
B. $9.00
C. $13.50
D. $18.00
________.
A. $25.00
B. $62.50
C. $125.00
D. $187.50
9. The amount that a person would accept in order to be compensated for a small loss in air quality is called
his/her ________.
A. willingness to pay
B. willingness to accept
C. consumer surplus
D. change in consumer surplus
10. Suppose public authorities were contemplating locating a hazardous waste incinerator in a particular
community. If the members of this community offered to pay $25,000 to keep it out of their area, this
amount is equal to their ________ for clean air.
A. willingness to accept
B. willingness to pay
C. use value
D. consumer surplus
11. The benefits of improved environmental quality come about because of reduced damages.
True False
12. The change in consumer surplus resulting from an increase in environmental quality (a public good) can
be measured in the same way as the change in consumer surplus for a private good.
True False
13. A major advantage of using contingent valuation methods is the fact that they rely on surveys.
True False
14. When people are asked willingness-to-accept questions, their answers are usually higher than their
willingness-to-pay responses for the same item.
True False
15. In surveys and experimental work where people are asked to compare gains and losses relative to a
reference point, they place a higher value on losses from this reference point than gains.
True False
16. Assume reductions in the amount of ground level ozone shift the marginal cost of producing alfalfa
from MC1 = 45 + 2QS to MC2 = 45 + 0.5QS. Use the producer surplus to estimate the maximum amount
alfalfa producers would be willing to pay for this improvement in the air quality if the market price of
alfalfa is $60/unit of output.
17. If the inverse demand equation for a market good is equal to: PD = 105 - 0.5QD. What is the consumer
surplus associated with consumption of 20 units of the good?
18. If a policy analyst imputes marginal willingness to pay for environmental quality to be equal to: MWTP
= 245 - 1.5EQ, where EQ represents a measure of environmental quality, what is the change in consumer
surplus associated with an increase in EQ from 60 to 70 units?
19. List the four methods that can be used to impute willingness to pay for environmental improvements.
20. List and very briefly explain three criticisms of the travel-cost method of imputing WTP for
environmental amenities.
21. List and very briefly discuss the strengths and weaknesses of contingent valuation methods for imputing
WTP for environmental amenities.
7 Key
1. Changes in productivity, health-care costs, loss of human capital and replacement/restoration of
damaged property or businesses are all examples of ________.
Accessibility: Keyboard Navigation
Difficulty: Easy
Field - Chapter 07 #1
Learning Objective: 07-01 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.
2. Preventative expenditures, hedonic estimation, surrogate markets and contingent valuation are all
examples of ________.
Difficulty: Easy
3. It is possible to estimate ________ by considering information about reductions in worker
productivity and medical expenditures.
A. demand for health care
B. health damages
C. output losses
D. willingness to pay for hospitals
Difficulty: Moderate
A. $7.50
B. $5.25
C. $4.50
D. $2.25
Difficulty: Easy
Learning Objective: 07-02 Explain the concept of producer surplus and how to calculate it graphically.
A. $900
B. $1,800
C. $2,100
D. $3,000
Difficulty: Easy
6. In the following figure, assume that improvements in air quality shift the marginal cost of production
from MC1 to MC2. If the producer surplus is used as an approximation of the benefits from improving
environmental quality, the maximum the producers would be willing to pay for the reduction in
pollution is ________ when the market price of the good is P1.
A. area E
B. areas E + D + C
C. areas D + C
D. area B + D
Difficulty: Easy
________.
A. $4.50
B. $9.00
C. $13.50
D. $18.00
Difficulty: Easy
Learning Objective: 07-03 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.
________.
A. $25.00
B. $62.50
C. $125.00
D. $187.50
Difficulty: Easy
9. The amount that a person would accept in order to be compensated for a small loss in air quality is
called his/her ________.
A. willingness to pay
B. willingness to accept
C. consumer surplus
D. change in consumer surplus
Difficulty: Easy
Learning Objective: 07-05 Explain why willingness to accept estimates generally exceed those of WTP.
10. Suppose public authorities were contemplating locating a hazardous waste incinerator in a particular
community. If the members of this community offered to pay $25,000 to keep it out of their area, this
amount is equal to their ________ for clean air.
A. willingness to accept
B. willingness to pay
C. use value
D. consumer surplus
11. The benefits of improved environmental quality come about because of reduced damages.
TRUE
Difficulty: Easy
12. The change in consumer surplus resulting from an increase in environmental quality (a public good)
can be measured in the same way as the change in consumer surplus for a private good.
TRUE
Difficulty: Easy
13. A major advantage of using contingent valuation methods is the fact that they rely on surveys.
FALSE
Although it is true that surveys are relatively easy to administer, they are also prone to bias since
respondents will have incentives to misrepresent their true WTP for the environmental amenity. Other
problems inherent with surveys include the biases of the creator of the survey questions, problems
with small sample size and self-selection issues. These problems associated with the use of surveys
make them a "disadvantage" of CVM.

Difficulty: Easy
Learning Objective: 07-04 Describe four methods of imputing WTP for improvements in environmental quality.
14. When people are asked willingness-to-accept questions, their answers are usually higher than their
willingness-to-pay responses for the same item.
TRUE
Difficulty: Easy
15. In surveys and experimental work where people are asked to compare gains and losses relative to a
reference point, they place a higher value on losses from this reference point than gains.
TRUE
This explains why WTA measures tend to be higher than WTP.

16. Assume reductions in the amount of ground level ozone shift the marginal cost of producing alfalfa
from MC1 = 45 + 2QS to MC2 = 45 + 0.5QS. Use the producer surplus to estimate the maximum
amount alfalfa producers would be willing to pay for this improvement in the air quality if the market
price of alfalfa is $60/unit of output.
The change in producer surplus will approximate the maximum that farmers will be willing to pay for
the improved air quality. Initially, output will equal 7.5 units and producer surplus is equal to:
PS1 = (60 - 45)7.5 = $56.25
After the marginal cost curve shifts, output will equal 30 and producer surplus is equal to:
PS2 = (60 - 45)30 = $225
The difference between PS2 and PS1 will approximate the maximum amount the farmers will be
willing to spend and this equals $168.75.
17. If the inverse demand equation for a market good is equal to: PD = 105 - 0.5QD. What is the consumer
surplus associated with consumption of 20 units of the good?
When 20 units are consumed, the price will be $95. Consumer surplus will be equal to the area of a
triangle with height 10 and width 20 which is $100.
Difficulty: Easy
18. If a policy analyst imputes marginal willingness to pay for environmental quality to be equal to:
MWTP = 245 - 1.5EQ, where EQ represents a measure of environmental quality, what is the change
in consumer surplus associated with an increase in EQ from 60 to 70 units?
To calculate the change in consumer surplus, we first calculate the level of consumer surplus for each
level of environmental quality and then we compute the difference between them. When EQ = 60
units, MWTP = $155 and consumer surplus will be the area of a triangle with height 90 and width 60
which is equal to $2,700. When EQ = 70 units, MWTP = $140 and consumer surplus will be the area
of a triangle with height 105 and width 70 which is equal to $3,675. The change in consumer surplus
is therefore equal to 3,675 - 2,700 = $975. Consumer surplus increases by $975 when EQ increases
from 60 to 70 units.
19. List the four methods that can be used to impute willingness to pay for environmental
improvements.
The four methods that can be used to impute WTP include: 1) preventative or mitigating expenditures;
2) hedonic estimation; 3) surrogate markets; and 4) contingent valuation.
Difficulty: Easy
20. List and very briefly explain three criticisms of the travel-cost method of imputing WTP for
environmental amenities.
The three main criticisms of the travel-cost method include: 1) multi-purpose visits: if the site in
question is not the only destination or if the main purpose of the trip is not recreational, it can be
difficult to accurately assess what costs of travel are actually associated with the site; 2) utility/
disutility of travel: travel costs may not actually be a good proxy for WTP for the site if the trip there
is either highly enjoyable or very unpleasant; and 3) survey sample bias: this method only collects
data from people who actually travel to the site even though others may still derive pleasure from
knowing it is there, so their WTP will be missing from final estimates.
21. List and very briefly discuss the strengths and weaknesses of contingent valuation methods for
imputing WTP for environmental amenities.
The main strength of CVM is its flexibility - the researcher has total control over what questions
to ask and surveys tend to be inexpensive to administer. There are three main weaknesses of CVM
including: 1) the hypothetical character of the questions: because people are being asked about their
WTP for environmental amenities (i.e., goods without an actual market or price), it is hard for them to
accurately assess what this actually is; 2) incentives to misstate WTP: people might understate WTP
if they think this will result in lower taxes/prices for the good or they may overstate WTP since they
know their actual share will be quite small; and 3) other practical problems with surveys: these could
include bias of the analyst, small sample sizes; self-selection problems, etc.
7 Summary
Category # of Questions
Accessibility: Keyboard Navigation 10
Difficulty: Easy 14
Difficulty: Moderate 7
Field - Chapter 07 21
Learning Objective: 07- 4
01 Distinguish between direct and indirect methods of calculating the WTP for improvements in environmental quality.
Learning Objective: 07-02 Explain the concept of producer surplus and how to calculate it graphically. 4
Learning Objective: 07- 5
03 Explain the concept of consumer surplus and how to calculate it graphically for a market good and a public good.
Learning Objective: 07-04 Describe four methods of imputing WTP for improvements in environmental quality. 4
Learning Objective: 07-05 Explain why willingness to accept estimates generally exceed those of WTP. 4

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This explains why WTA measures tend to be higher than WTP.

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