econ midterm

3 things of econ

* production
* distribution
* consumption

how is everything connected?

people

2 main environmental problems

* scarcity / shortages
* pollution

positive feedback loop

* human response to problem makes it worse

negative feedback loop

* human response lessens problem

inputs → the economy → outputs

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the problem

* inputs: natural resources
* the economy: consumers, producers, gov./regulation
* outputs: waste and pollution
* the problem: limitations

what exactly is the limitation?

there is no price on raw materials bc they are considered public goods

positive economics

* using data or fact to understand impacts of economic activity
* evaluate impacts

normative economics

* using judgement to identify what is the best policy
* approach assess the desirability of a policy

economic analysis

* provides basis to ID why market failed
* helps design new incentives to restore econ and environ
* helps choose optimal resource allocation

what does market failure mean?

* set prices no longer work

economic efficiency

* a condition in which an allocation of resources maximizes the economic surplus. best results

economic surplus:

* the sum of consumer’s surplus and producer’s surplus.

consumer’s surplus:

* willingness to pay - total cost to consumers
* willing to pay - what paid

producer’s surplus:

* total revenue - total cost to produce

consumers on a graph

* WTP = A+B+C
* Cost = B+C
* Surplus = WTP - Cost = A

producers on a graph

* Cost = C
* Revenue = B + C
* Surplus = Revenue - Cost = B

consumers surplus graphed

* area under the demand curve and above equilibrium prices
* (1/2) height x base

producers surplus graphed

* area under the equilibrum price line and above the supply curve
* (1/2) height x base

the cavet

* economic efficiency is only achieved if the owner of a resource has a well-defined property rights

3 property rights

1. exclusivity: all benefits using the resource go to the owner only → all money goes to owner
2. transferability: property right is transferable → can buy / sell portions
3. enforceability: property right is secure from invoking seizure or encroachment → people can’t just buy whatever

public goods

* parks, rivers, air quality don’t meet the property rights criteria

economic surplus only occurs when

the sum of CS and PS when markets are perfect and property rights are well defined

non-rivalry public goods

* goods/services that can be consumed by many without diminishing the value to anyone

private goods

* market price is the efficient mechanism

public goods market price

* is not efficient because consumers want to pay the lowest price possible or free ride ( non - excludability )
* causes market failure

common pool resources

* goods that are non-excludable and rival
* have no real price or property rights = over use

externality

* welfare of some agent depends on their own activities and activities of another

positive externality

* positive external benefits

negative externality

* negative external cost

what is market failure?

* unable to allocate resources efficiently
* price of marginal cost no longer successful

deadweight loss

* welfare lost bc the beneficial amount of activity did not occur

potential solutions to market failure / deadweight lost

* regulations
* tax
* legal system
* private negotiation
* information

coase theorem

* key issue is ID who has property rights
* doesn’t matter who gets property rights as long as negotiating costs are negligible and affected parties can negotiate freely

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2 key things with coase theorem

1. transactions are negligible
2. Number of affected parties is small

* COST ARE NEGLIGIBLE AND CAN NEGOTIATE FREELY

how to identify what’s best:

* assess the desirability of policy before putting it into place
* if it is already in place → evaluate how the program has worked in practice

benefit-cost analysis is helpful in evaluating these trade offs

* assessing pre-defined options
* finding the optimal outcome

support the policy if:

* B>C
* B/C > 1

benefits on a graph

* area under the demand curve
* total benefits = rectangle + triangle under the demand curve

costs on graph

* total cost: area under the marginal cost (MC) curve

net benefit:

* benefit - cost = area below the demand curve and above the marginal cost curve
* (1/2) x b x h

opportunity cost

* the value of the next best alternative
* or the forgone value that would have resulted from an alternative use of the resource
* what would have been paid instead = the opportunity cost

First Equimarginal Principle (Efficiency Equimarginal Principle):

* social net benefits are maximized when the social marginal benefits from an allocation equal the social marginal costs

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social marginal benefit:

* the increase in social benefits received from supplying one more unit of the good or service

social marginal cost:

* the increase in social cost incurred from supplying one more of the good or service

expected benefits:

* ( percent x benefit ) + ( percent x benefit )

net present values

* the present value of benefits/costs that will occur in the future
* process of calculating present value is called **discounting**

discount rate

* the rate of interest used to convert (discount) the future value into present value
* = r

present value equation

* Pv = NB / (1 +r)^t

present value steps

1. calculate the net benefits for each year ( benefits - cost)
2. use the discount rates to calculate the present value from the project
3. sum the present values to calculate net present values for the project

NPV decreases rapidly with

increasing discount rates

dynamic efficiency

* an allocation of resources across t time periods satisfies the dynamic efficiency criterion **if it maximizes the present value of net benefits**

static efficiency:

* an allocation satisfies the (static) efficiency criterion **if it maximizes economic surplus or net benefits**

if the expected net benefit is positive then

* you should implement the project

risk neutral

* a decision that maximizes expected net benefits
* they are indifferent

risk averse

* willing to accept lower payments but with more certainty

risk loving

* willing to accept a risky outcome with higher payments

climate change

* is the long term changes in temperatures and weather patterns

how long have human activities pushed climate change?

* 1800s

how climate change happens

* greenhouse effect:
* greenhouse gases emitted by humans wrap the earth’s atmosphere trapping sun’s heat and raising temperatures

direct effects of extreme climate change:

deaths, property, damage, crop damage

less obvious effects:

* negative impacts on human health, nutritional content of foods, disruption of food distribution

who is affected most?

* poor and marginalized farmers
* developing countries

what can economics offer?

* market based strategies and regulations
* behavioral nudges
* climate justice:
* polluters pay a premium to the poor and vulnerable populatuions/communities

two common responses to climate change:

* mitigation
* adaptation

mitigation:

* reducing flow of greenhouse gases into atmosphere by reducing sources of these gases or enhancing the “sinks” that accumulate and store these gases (oceans ex)

adaptation:

* adapting to the changing climate by adjusting to actual or expected future climate
* goal is to reduce our risks from the harmful effects of climate change

social cost of carbon

* the additional economic damage that would accrue from emitting one more ton of CO2 into the atmosphere
* the marginal increase in the present value of the economic damages resulting from 1 metric ton increase in CO2 emissions
* SSC

SSC ( social cost of carbon )

* is a present value calculation (timing of emission reduction and the discount rate )
* depends on assumptions about discount rates, the size of the population affected, and the magnitude of the damages

estimating SCC ( social carbon cost )

1. predict future emissions based on population , economic growth rates, and other factors
2. model future climate responses
3. assess the economic impact that these climatic changes will have on agriculture, health, energy use, and other aspects
4. convert future damages into their present day value and add them up to determine total damages

Integrated Assessment Model (IAM)

* used to calculate SCC and the benefits of abatement policies
* integration of
* climate
* biophysical
* demographic
* economic models

what is happening with precipitation?

* global average precipitation is increasing
* distribution is uneven
* some areas getting dryer

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Human influence:

* we for SURE influencing

greenhouse gasses

* trap heat in atmosphere

carbon tax

gov sets price and market sets amount

cap and trade

gov sets amount, market determine price

climate change mitigation

two common policies are cap and trade and carbon tax

existence value

WTP to ensure that a resource continues to exist, with no future expectations (no use at all)

which of the following are the two categories WTP estimation methods?

revealed preferences and stated preferences

revealed preference

used when value is directly observable

stated preference

used when value is not directly observable

* contingent valuation
* choice experiment

contingent valuation

this approach creates a hypothetical market and ask for respondents to consider a WTP question based on this market

choice experiments

estimating the value of a hypothetical improvement in attributes of a non-market good

hedonic pricing method

revealed preference method of non-market valuation that uses data on external factors to estimate the value of the environment

economic water scarcity

water is available but cant get bc economic issues

an individuals WTP for small changes in mortality risk

value of statistical life

largest users of water

* thermoelectric power
* irrigation

most groundwater is

non-renewable resources

most surface water is

renewable

leapfrogging:

new development continues not on the very edge of the current development, but farther out.

marginal user cost

the opportunity cost of consuming another unit of groundwater today

riparian rights = common property

allocate the right to use water to the owners of land abutting a water source

regulated riparian = public property

allocate the right to use water water

dynamic efficiency

allocation maximizes the present value of net benefits

appropriative rights // prior appropriation doctrine

water should be appropriated and applied to a beneficial use in order for someone to get the rights to use it

efficient allocation of groundwater is achieved when

the net present value of groundwater allocation over time is maximized

state of texas uses what methods

* hybrid combo
* riparian
* appropriative rights

sources of inefficiencies in current water allocation:

* leapfrogging
* market power
* failure of realize non-use value land
* incompatible land use

sustainable yield

the fisheries catch level that equals the growth rate of the fish population

stock pollutants

the environment has little to no absorptive capacity