EC318 Midterm 1

Scarcity

Wants exceed the limited resources available to satisfy them.

Trade-off

Getting more of one thing requires giving up something else.

Opportunity Cost

The value of the best alternative forgone.

Incentive

Something that changes the costs or benefits of a choice and encourages or discourages an action.

Neoclassical Economics (NCE)

Focuses mainly on markets, efficiency, and the allocation of scarce resources.

Ecological Economics (EE)

Views the economy as part of the ecosystem and considers allocation, distribution, and scale.

Allocation

How resources are used or divided among competing uses.

Distribution

How resources, benefits, or costs are shared among people.

Scale

The physical size of the economy relative to the ecosystem.

Throughput

Flow of materials and energy from the environment, through the economy, and back as waste.

Economic Growth in EE

A quantitative increase in the physical size or throughput of the economy.

Development in EE

Improving people’s well-being without using more resources or creating more waste.

Natural Resource Economics

Studies resources flowing from nature into the economy and how they are used over time.

Environmental Economics

Studies environmental problems, especially pollution and waste flowing from the economy to nature.

Natural Capital

Natural resources and environmental services used in production and consumption.

Source

The environment supplying resources to the economy.

Sink

The environment receiving or absorbing waste from the economy.

Resource Degradation

Overuse or overharvesting of environmental sources.

Pollution

Overuse of the environment’s waste-absorbing sinks.

Open System

Exchanges both matter and energy with its surroundings.

Closed System

Exchanges energy with its surroundings, but not matter.

Isolated System

Exchanges neither matter nor energy with its surroundings.

First Law of Thermodynamics

Matter and energy cannot be created or destroyed; they can only change form.

Second Law of Thermodynamics

Entropy increases; energy available for useful work decreases during conversion.

Positive Economics

Explains or predicts what is happening; statements can be tested against evidence.

Normative Economics

Recommends or prescribes what should happen.

Absorptive Capacity

The environment’s ability to absorb pollutants.

Stock Pollutant

A pollutant with little or no absorptive capacity that accumulates over time.

Fund Pollutant

A pollutant the environment has some capacity to absorb.

Local Pollutant

Causes damage mainly near the source.

Regional Pollutant

Causes damage over a wider region beyond the immediate source.

Global Pollutant

Causes damage that affects the planet globally.

Point-Source Pollution

Pollution from a clearly identifiable discharge point.

Nonpoint-Source Pollution

Pollution from dispersed sources with no single identifiable discharge point.

Continuous Emissions

Emissions occurring regularly or continuously.

Episodic Emissions

Emissions occurring periodically or in separate events.

IPAT

Environmental impact depends on Population × Affluence × Technology.

Population in IPAT (P)

Number of people contributing to environmental impact.

Affluence in IPAT (A)

Consumption per person.

Technology in IPAT (T)

Environmental impact created per unit of consumption/production technology.

Environmental Kuznets Curve (EKC)

Hypothesized relationship where degradation first rises with income, then may fall after a turning point.

Environmental Kuznets Curve (EKC) limitation

Economic growth alone does not guarantee environmental improvement.

Renewable Resource

A resource that replenishes naturally on a reasonable timescale, but can still be depleted if use exceeds growth.

Nonrenewable Resource

A resource that does not replenish on a meaningful human timescale.

Natural Resource Stock Equation

S1 = S0 - Q0 + G0: next stock = starting stock − use + growth/additions.

S₀

Resource stock available at the beginning of the period.

G₀

Growth or additions to the resource stock during the period.

Q₀

Quantity of the resource used or extracted during the period.

Stock-Flow Resource

A resource whose physical stock is materially transformed or reduced when used.

Fund-Service Resource

A resource that provides services over time and is worn/degraded rather than incorporated into output.

EE Evolution of the Economic System

Hunter-gatherers → agricultural societies → Industrial Revolution → era of ecological constraints.

Rostow Stage 1: Traditional Society

Rural, subsistence-based economy with low productivity and little saving or investment.

Rostow Stage 2: Preconditions for Takeoff

Trade, infrastructure, specialization, saving and investment begin preparing the economy for growth.

Rostow Stage 3: Takeoff

Industrialization accelerates and economic growth becomes self-sustaining.

Rostow Stage 4: Drive to Maturity

Technology spreads, new industries emerge, and production becomes more diversified.

Rostow Stage 5: High Mass Consumption

High consumption, many consumer choices, durable goods and a large service sector.

Empty World

Economy is small relative to the ecosystem; natural capital is relatively abundant.

Full World

Economy is large relative to the ecosystem; natural capital and ecological limits become increasingly scarce/important.

Whole vs. Part — EE

Earth/ecosystem is the whole; the economy is a subsystem within that finite whole.

Market Failure

When the private market does not produce the socially efficient allocation of resources.

Rival

One person’s use reduces the amount available for others.

Nonrival

One person’s use does not reduce the amount available for others.

Excludable

People can be prevented from using the good.

Nonexcludable

Preventing people from benefiting is impossible or very costly.

Private Good

Rival + excludable.

Public Good

Nonrival + nonexcludable.

Common Resource

Rival + nonexcludable.

Natural Monopoly / Club-Type Good

Nonrival + excludable.

Externality

A cost or benefit affecting a third party that is not reflected in market price.

Negative Production Externality

Production imposes an external cost on others; pollution is a common example.

Positive Production Externality

Production creates an external benefit for others.

Negative Consumption Externality

Consumption imposes an external cost on others.

Positive Consumption Externality

Consumption creates an external benefit for others.

Marginal External Cost (MEC)

Additional cost imposed on third parties by one more unit of production.

Marginal Social Cost (MSC)

Full cost to society: private marginal cost + marginal external cost.

Why does a negative production externality cause overproduction?

Firms ignore MEC, so private cost is too low and

Free Rider

Someone who receives a good’s benefits without contributing to its provision.

Underprovision of a Public Good

Private market provides less than the socially efficient amount.

Why do free riders cause underprovision?

Willingness to pay is hidden, so private demand understates the true social benefit.

Public-Good Marginal Social Benefit

Add each person’s willingness to pay vertically at the same quantity.

Tragedy of the Commons

Individuals overuse a shared rival, nonexcludable resource.

Why are common resources overused?

Individuals get the private benefit while depletion costs are shared by everyone.

Monopoly

A market with one seller that has market power.

Monopoly inefficiency

A monopolist can restrict output below the socially efficient quantity and charge a higher price.

Marginal Revenue (MR)

Additional revenue earned from selling one more unit.

Deadweight Loss (DWL)

Loss of potential total surplus caused by an inefficient allocation.

Asymmetric Information

One party has more or better information than another, potentially causing inefficient decisions.

Government Failure

Government actions or policies lead to an inefficient allocation of resources.

Rent Seeking

Using resources to obtain special economic advantages through political or regulatory activity.

Abiotic Resources

Nonliving natural resources, e.g. minerals, fossil fuels, water and sunlight.

Biotic Resources

Living biological resources and associated ecosystem services.

Benefit-Cost Analysis (BCA)

Comparing an action's total benefits and costs to determine whether it produces positive net benefits.

Net Benefits (NB)

Total benefits minus total costs: NB = TB − TC.

Marginal Benefit (MB)

Additional benefit from one more unit of a good or activity.

Marginal Cost (MC)

Additional cost of one more unit of a good or activity.

First Equimarginal Principle

Net benefits are maximized when marginal benefits equal marginal costs (MB = MC).

Static Efficiency

Allocation that maximizes net benefits within a single time period.

Present Value (PV)

Current value of future money or benefits after discounting: PV = FV/(1+r)^t.

Discount Rate

Rate used to convert future benefits and costs into their present values.

Net Present Value (NPV)

Present value of benefits minus present value of costs.