Problem Set #1



ECO360: Development Economics, Rizzo

November 6, 2004

Practice Questions for 3rd Examination

1. There are two owners or two different forests (A & B). For each example, choose the person that is more likely to cut down his forest earlier:

a. A has contracted cancer. B is healthy.

b. The stock market in A is crashing. The stock market in B is stagnating.

c. Chainsaw prices rise in A. Chainsaw prices fall in B.

d. Person A is rich. Person B is poor.

2. In most countries, as development evolves, their economies transform from agrarian ones to ones dependent on manufacturing and other secondary and tertiary industries. However, for some countries like Brunei and Kuwait that are entirely dependent on natural resources for income, there is little scope for transforming resource rents into other productive capital in their societies. What can these countries do to ensure that they can maintain living standards into the future as their current natural resource stocks are depleted?

3. In designing programs to assist the poor in the developing countries, economists need to understand three things about the nature of poverty in the various LDCs. What three factors need to be indentified in order to construct sound policy? Provide an example of each factor that was demonstrated in the Grameen Bank video.

4. Zambia is deciding on whether to extract all of its copper reserves today or to wait until 10 years from now. The Zambians are famous for their deep affection for preserving the well being of future generations. If this is true, then is it the case that today’s Zambians should leave all of the copper in the ground?

5. Why are freeways overly congested in Los Angeles and Atlanta?

a. Describe ONE solution to the traffic problems.

6. Why might it be in the direct economic interest of the United States to finance rain forest conservation programs in Amazon counties such as Brazil?

7. In the modern sector in the LDC, factor prices are often highly distorted – often times intentionally by governments in order to stimulate growth. Provide an example of a factor price distortion. How will eliminating this distortion (making prices reflect true scarcity values) affect income inequality in a developing country?

8. Can individuals impose negative externalities on firms?

9. Describe how our current system of national income accounting does not tell us anything about whether our current consumption patterns are sustainable.

10. You are the poverty czar in a developing country and are responsible for creating a welfare program to assist the most desperately poor people in your country. Why might you consider making welfare payments in the form of “in-kind” basic foodstuffs rather than in cash?

11. Microcredit organizations such as the Grameen Bank provide loans to poor people that would not be able to receive loans from traditional banks.

a. Why do the poor have so little access to traditional sources of credit?

b. Why is the Grameen Bank able to make loans to poor women and not lose money?

12. Describe the costs of a leather-tanning firm polluting an Adirondack water system.

a. If the tanning process causes so much damage, why do the tanning firms dump chemicals in the Adirondack waterways?

13. (True, False, Explain) Brazil pursued a textbook perfect environmental strategy with regard to development of the Amazon rainforest region.

14. What is the difference between equality and equity?

15. A fertilizer firm locates on a riverbank alongside a brewery. The fertilizer firm dumps chemicals into the river as a by-product of its production process. The brewery uses this mountain river-water as the key ingredient in its beer.

True, False, Explain

a. If the brewery is granted property rights to the river, then the river will end up with zero pollution.

b. Economic theory says that since the fertilizer firm is polluting the water, it should not be able to receive property rights to the water.

c. If the fertilizer firm is granted property rights to the river, then the river will become a toxic waste site.

16. A socialist economy is one where the government owns and controls the means of production. Why might this system be attractive to a poor, agricultural country that wishes to grow quickly?

17. Why is an effluent fee likely to produce a better economic outcome than a standard that forces a specified amount of emissions reductions?

18. Why might instituting tradable marketable permits produce more desirable economic outcomes than a system of effluent fees?

19. Is the best level of pollution zero?

20. The case study on Mali illustrates the importance of _______ in promoting economic development.

21. Critics of social safety net programs believe that such programs create a dependence and reduce incentives for the poor to invest in education and assets that will bring their families out of poverty. How might social safety net programs actually promote future economic growth?

22. How did the classroom experiment demonstrate why common property problems develop?

23. (True or False – Describe). Since prices are free to rise in capitalist societies when goods become more scarce, the economic cost to consumers is larger in capitalist societies than if the government stepped in and capped price increases as often happens in socialist ones?

24. What will happen to poverty and income inequality in a developing country if a dualistic development path follows a “modern-sector enrichment growth” process? Why?

25. Even John Rawls realized that some degree of income inequality was necessary to preserve incentives. However, there is likely a point where too much income inequality will hurt economic growth.

26. Biologists can calculate the “maximum sustainable yield” from any renewable resource. This represents the maximum amount of fish that can be caught (trees harvested, etc.) and still keep the size of the resource stock constant. If a country harvested its resources at this level, would it be maximizing its citizens’ welfare? Why or why not?

27. I have always believed that it is inefficient to leave “cash-on-the-table.” If the North places a high value on resource and environmental sustainability and the South cares primarily about economic growth, it suggests that there are mutually beneficial transactions that can be made given the increased globalization of the world’s economies. One such example was outlined in your readings. Describe it briefly for me.

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