Midterm Exam Guide

Markets, Institutions, Time, and Introductory Fisheries

Review scope, learning targets, course materials, and practice prompts for the October 19 midterm.

Exam logistics

• Date: Monday, October 19
• Duration: 50 minutes
• Quiz and review: Friday, October 16
• Coverage: Weeks 1–8
• Bring: writing tools. A reference sheet and calculator are optional; follow the guidelines below.

Exam structure and question types

The exam will include:

• Multiple Choice Questions
• Fill-in-the-Blanks Questions
• Short Answer Questions
• Analytical Questions

Questions use supplied information, tables, labeled graphs, short explanations, and simple arithmetic. Practice interpreting the economic relationships and explaining your reasoning; extensive algebra is not required.

Reference sheet guidelines

• You may bring one reference sheet (8.5 × 11 inches).
• The reference sheet must be handwritten.
• You may write on both sides (two pages total).
• You may include any content you find helpful.
• You must submit the reference sheet with your exam.

Calculator and electronics policy

You may bring a basic (non-graphing) calculator. A calculator is optional, not required.

No other electronic devices are allowed during the exam.

Topics covered

The main review materials are Lectures 2–5, Classwork 1–5, Homework 1 (Questions 2–3), and Homework 2, together with the introductory portion of Lecture 6 covered before the exam.

Give particular attention to Lecture 5 and the covered portion of Lecture 6. Use the earlier market, externality, and institutional material to explain the benefits, costs, and incentives in these resource problems.

ImportantWhere the midterm stops

For Lecture 6, review the fish-stock, natural-growth, harvest, and sustainable-yield material covered in class before the exam. Use the October 16 review to confirm the stopping point. Fisheries dynamics, policy, and institutions continue in Week 9; the entire Lecture 6 deck is not automatically included.

Valuing Nature begins in Week 10 and is not covered on this midterm. Valuation methods such as contingent valuation, travel cost, hedonic pricing, and benefit transfer are outside this guide’s scope.

You should be able to do the following:

1. Markets, surplus, and externalities

• Solve and graph a linear market using demand as marginal benefit (MB) and supply as private marginal cost (PMC). Interpret shifts in demand or supply, and label quantities, prices, and units.
• Calculate consumer surplus, producer surplus, tax revenue, and deadweight loss using rectangles, triangles, and trapezoids. Explain how a quota or tax changes the outcome.
• For a negative externality, construct SMC=PMC+EMC, find the market and efficient quantities, and calculate a corrective tax equal to external marginal cost at the efficient quantity.
• Account for welfare consistently: include external damage and tax revenue without double counting transfers. Distinguish total external damage from deadweight loss.
• Explain why an efficient harvest need not be zero. Distinguish the externality cost imposed on others from the stock-scarcity cost of giving up future resource use.
• Track the stock using S_{t+1}=S_t+G_t-H_t: distinguish the amount available from growth and harvest during the period, as in Classwork 1–2.
• Apply this reasoning to Lake Erie: identify the decision, affected parties, and omitted marginal harm. Explain why the size of a regional economy or the sum of firms’ lost sales is not automatically a measure of welfare damage.

2. Rights, open access, and public goods

• Define rivalry and excludability, and classify private goods, club goods, common-pool resources, and public goods using natural-resource examples.
• Distinguish a resource’s physical characteristics from its governance regime: private property, state property, common property, or open access. Common property is not the same as open access.
• Explain exclusivity, transferability, and enforceability. Use Classwork 3 and Classwork 4 to explain how access rules, monitoring, and penalties change incentives.
• In the total and marginal effort frameworks, locate efficient effort where MB=MC and open-access effort where AB=AC (equivalently, TB=TC). Calculate economic rent and explain its dissipation under free entry.
• Explain why zero economic rent does not mean zero catch or zero income. The model’s costs include opportunity costs.
• Explain free riding and vertically sum individual marginal benefits for a public good. Find efficient provision where the summed marginal benefit equals marginal cost.
• Compare judicial liability with regulation of activity, access, practices, or information. Define transaction costs and explain why identifying sources, measuring harm, monitoring, enforcement, and rent seeking can limit a policy’s performance.

3. Resource allocation over time

• Discount future benefits and costs to a common date. Distinguish an annual rate from the factor over the full interval, and explain the difference between a market interest rate and a social discount rate.
• Construct marginal net benefit, MNB=MB-MC, and calculate total net benefit as the area under the MNB curve.
• Allocate a fixed, depletable stock between two periods using the stock constraint and equality of present-value marginal net benefits. Explain the mirrored quantity axes and identify the welfare loss from excessive current extraction.
• Compare feasible extraction plans using current net benefits plus discounted future net benefits. When only a set of plans is available, compare those plans using the supplied information.
• Distinguish a private present value from a social present value. In the social calculation, include external damage in the period when it occurs and use the specified social discount rate. Explain separately how omitted damage and a different discount rate can change an allocation.
• Calculate user cost and scarcity rent, R=P-MC. Explain the future opportunity cost of one more unit extracted now.
• Explain when a depletion tax corrects a myopic decision and why the same scarcity-based tax is not automatically helpful when forward-looking private owners already internalize scarcity.
• Explain how a higher discount rate shifts extraction toward the present in the two-period model, holding the other assumptions fixed.
• State Hotelling’s rule as a relationship for the net resource price, not the full market price. Explain the extract-now-versus-save-for-later arbitrage and why observed resource prices need not follow the simple benchmark.
• Explain how substitute technologies and extraction costs affect whether a physically remaining resource is economically worth extracting.

For an interval of T years, let D=(1+r)^T be the denominator used to discount Period 2 values. For an interior allocation that uses the fixed stock S:

PV(NB_2)=\frac{NB_2}{D},\qquad Q_1+Q_2=S,\qquad MNB_1(Q_1)=\frac{MNB_2(Q_2)}{D}.

Be able to explain these relationships in words, not just substitute numbers. If the model supplies D directly, do not discount a second time.

4. Efficiency, fairness, and sustainability

• Distinguish maximizing present-value net benefits from leaving future generations no worse off. An efficient allocation is not necessarily sustainable or fair.
• Compare each generation’s undiscounted net benefit when applying the course’s sustainability criterion. Keep that comparison separate from the present-value efficiency calculation.
• Calculate how saving part of current net benefits and transferring the investment proceeds changes each generation’s well-being. Distinguish saving resource wealth from leaving the physical resource unextracted.
• Explain the Hartwick rule and its substitution assumptions: investing all scarcity rent is a weak-sustainability argument, not a guarantee that every ecological function can be replaced.
• Distinguish weak, strong, and environmental sustainability. Use the course’s resource-fund examples to explain both the potential benefits of saving rents and the limits of a financial fund as evidence of sustainability.

5. Introductory fishery dynamics

Apply the following targets to the Lecture 6 material covered before the exam, as clarified at the October 16 review:

• Distinguish stock (S), natural growth (G), harvest (H), and fishing effort (E).
• Use growth and harvest graphs to determine whether the stock rises, falls, or remains unchanged: G>H, G<H, or G=H.
• Use stock accounting and the information in a growth graph or table to explain how a change in biological conditions affects feasible harvest and stock change.
• Interpret carrying capacity, a low-stock threshold, and maximum sustainable yield in the model shown in class. Distinguish the stock that generates MSY from the size of MSY itself.
• Explain why an immediately larger catch need not be sustainable, and why a biological yield target is not automatically an economic-efficiency target.

This is a graphical and verbal review of renewable-resource dynamics, not a request to solve a new calculus-based fishery model. The open-access effort calculations from Lecture 4 and Homework 1 remain part of the earlier core material.

Where to practice

Topic	Lecture slides	Applied practice
Market foundations	Lecture 2	Classwork 1
Externalities and welfare	Lecture 3	Classwork 2; Homework 1, Question 3
Rights, open access, and public goods	Lecture 4	Classwork 3; Classwork 4; Homework 1, Questions 2 and 3
Time, scarcity, and sustainability	Lecture 5	Classwork 5; Homework 2
Introductory fisheries	Lecture 6	Recreate the stock, growth, and harvest graphs covered before the exam

Use the lectures and completed assignments to set the depth of your review. Relevant TL readings are Chapter 2 (externalities and institutions), Chapters 6–7 (dynamic efficiency and depletable resources), and the introductory Chapter 8 material corresponding to the fisheries graphs covered in class.

Practice prompts

These are review tasks, not a statement of the exam’s question count or point weights.

1. External costs: Redo Classwork 2 with your notes closed. Find the market and efficient harvests, corrective tax, total damage, and welfare gain. Explain why the damage area and welfare-loss area differ.
2. Institutions: Recreate Homework 1’s two-panel open-access graph. Explain why entrants use average rather than marginal returns, then compare that entry problem with the fixed-group Shared Bay experiment. Propose a rule and explain how it would be monitored and enforced.
3. Public goods: Draw two individual marginal-benefit curves for habitat protection. Construct their vertical sum, add marginal cost, and explain both the efficient quantity and the free-rider problem.
4. Time and scarcity: Redo Classwork 5 or Homework 2. Compare extraction across periods using the stock constraint, net benefits, and discounting. Draw the present-value marginal comparison, interpret user cost and scarcity rent, and explain the effect of changing the discount rate.
5. Efficiency and fairness: Use Homework 2’s saving-and-transfer example to compare present-value efficiency with each generation’s well-being. Explain why a fund’s existence alone proves neither efficient extraction nor full sustainability.
6. Fisheries graphs: For the graphs covered before the exam, mark a stock where growth exceeds harvest and one where harvest exceeds growth. Explain the direction of stock change and why a one-time catch is different from a sustainable catch.
7. A short policy argument: Using Lake Erie or the shared aquifer, identify the omitted cost, recommend one institution, and explain one information or enforcement problem. Distinguish welfare effects from changes in firms’ sales.
8. Private and social decisions: Explain how to compare resource plans when benefits and external costs occur at different dates. State what belongs in each period’s social net benefit, which discount rate applies, and why a private ranking can differ from a social ranking. Keep real resource costs separate from transfers.

Best review method

Work from a blank page before reopening the slides or example answers. For each topic, produce one labeled graph, one calculation where applicable, and a short explanation of the incentive or opportunity cost. Check the algebra, units, welfare accounting, and assumptions; then explain why each correction matters. Bring unresolved questions to the October 16 review.