Environmental Economics

Adam Smith

Proposed the “Invisible Hand,” and that market’s are driven by incentives which maximize welfare.

MEC

Marginal external cost

Positive economics

Describing what is, what was and what will be.

Normative economics

Attempting to answer what should be (equity, liberty, efficiency).

Static efficiency

Maximizing welfare by ensuring that: economic surplus = consumer + producer surplus.

Consumer surplus/net benefit

The difference between what a consumer is willing to pay for a good/service vs. what they actually paid for it.

Producer surplus

The difference between the amount a good/service is sold for vs. what the producer would be willing to accept for it.

Area of a trapezoid

(length 1 + length 2) * 0.5 * height

Consumer willingness to pay

Area under the demand line up to the specified quantity.

3 required factors for efficient property right

exclusivity, transferability, enforceability

Coase’s Theorem

As long as negotiation costs are negligible, efficient allocation will result regardless of who holds property rights.