AEM_230_Prob_Set__4___Fall_2007_Solutions

AEM_230_Prob_Set__4___Fall_2007_Solutions - AEM/ECON 230...

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AEM/ECON 230 Prof. David Lee International Trade and Finance Fall 2007 Problem Set #4 – Solution Key Due on Saturday, November 17, at 4:30PM Question 1: Environmental Kuznets’ Curve [18 points] (a) Indicate whether each of the four scenarios presented in Table 1 is compatible or not with the relationship between incomes and environmental degradation posited by the “Environmental Kuznets’ Curve”. Provide a brief explanation for each case. [12 points] Table 1: Per Capita Income and Water Pollution Level: Four Different Scenarios Scenario A: Compatible with EKC. At a first stage environmental degradation increases as per capita income increases. When per capita income reaches a certain threshold, basic economic development needs are met and interest in a cleaner environment rises. After the threshold, environmental degradation decreases as per capita income increases. This matches the inverted U-shape of the EKC. Scenario B: Incompatible with EKC. Environmental degradation first decreases and then increases as per capita income increased. This does not match the inverted U-shape of the EKC. Scenario C: Compatible with EKC. Environmental degradation increases as per capita income increases from very low levels. This is the case of a developing country that is still in the upward leg of the inverted U-shape of the EKC. Scenario D: Incompatible with EKC. According to the EKC, environmental degradation should increase (and not decrease) as per capita income increases from very low levels.
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(b) Figures 1 and 2 indicate that greenhouse gas emissions increased significantly in the United States and Canada between 1990 and 2004. Given (1) that both countries have very high per capita income levels and (2) assuming that both countries experienced significant growth in average per capita incomes over the 1990-2004 period, what can you conclude about the validity of the “Environmental Kuznets’ Curve”? [6 points] Figure 1 Figure 2 Greenhouse gas emissions per person Canada, 1990 to 2004 Year Source : Environment Canada. 2006a. National Inventory Report: Greenhouse Gas Sources and Sinks in Canada, 1990–2004. Greenhouse Gas Division, Ottawa, Ontario. We cannot conclude that the Environmental Kuznets Curve is invalid. Recall that the EKC tells us that at a first stage environmental degradation increases as per capita income increases. After a certain threshold per capita income level is reached, environmental degradation decreases as per capita income increases (inverted U-shape curve). Here, greenhouse gas emissions have increased as per capita income increased in two countries with very high levels of socioeconomic development. Nevertheless, the fact that we do not observe the inverted U-shape prescribed by the EKC does not imply that the theory behind the EKC is incorrect. One could argue that for this particular type of environmental degradation (i.e. greenhouse gas emissions) the United States and Canada have not yet reached the threshold per capita income level at which degradation should start to
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This homework help was uploaded on 02/19/2009 for the course AEM 2300 taught by Professor Lee,d.r. during the Fall '06 term at Cornell University (Engineering School).

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AEM_230_Prob_Set__4___Fall_2007_Solutions - AEM/ECON 230...

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