Economics and Environmental Economics

A series of vocabulary flashcards based on key concepts from the lecture notes on economics and environmental economics.

Economics

The ability to allocate scarce resources to unlimited wants; a social science focused on human behavior in consumption, production, exchange, and distribution.

Environmental Economics

the study of the relationship between the economy and environment, emphasizing sustainable management of natural resources and reducing pollution

Sustainable Development

improving life for society today without jeopardizing the planet or depleting resources for future generations

Normative Decision Making

Focuses on what ought to be by using value judgments to determine the best environmental policies, such as taxing pollution or prioritizing sustainability over short-term profits

Ecological vs. Environmental Economics

Environmental Economics treats the environment as a resource within the market system. Ecological Economics views the economy as a subsystem of the planet's finite ecosystem. Ecology takes precedence over human needs/wants, Environmental issues should be dealt with multi-disciplinary approach; prioritizes ecological limits

Economic Systems (Capitalism vs. Socialism)

Capitalism is based on private ownership and competition to drive profit and innovation. Socialism focuses on collective ownership and government regulation to achieve equality and wealth redistribution.

Allocative Efficiency

Resources are distributed to maximize societal benefit. Conditions: P = MC and MB = MC.

Distributive Efficiency

Goods and services are received by those with the greatest need to maximize overall utility. MBa/MBb = Pa/Pb

Marginal Benefit (MB) vs. Marginal Cost (MC)

MB = extra utility or revenue received from one more unit; MC = extra cost from producing or consuming one more unit

Consumer Surplus (CS) vs. Producer Surplus (PS)

CS is the difference between willingness to pay and the actual price. PS is the difference between the price received and the minimum acceptable price.

Market Failure

A source of inefficiency in resource allocation characterized by externalities, public goods (pure and quasi), market power (monopolies), and information gaps.

Functions of Government in the Economy

Set rules/monitoring, maintain infrastructure, assist needy citizens via transfer payments, mitigate market failures, and stabilize the economy.

Tragedy of the Commons

when individual overuse or deplete a shared resource due to self interest, leading to its destruction for everyone

Net Present Value (NPV) Formula

Used to calculate the value of future cash flows today: PV = \frac{FV}{(1 + r)^t}.

Dynamic Resource Use & User Cost

Dynamic use considers resources across generations. User cost is the opportunity cost of consuming non-renewable resources today, representing lost future profits.

Non-Market Valuation (Non-use Values)

Includes indirect use, direct use, existence value (knowing it exists), bequest value (value for future generations), and option value (maintaining future options).

Methods of Valuation

Willingness to Pay (WTP), Travel Cost Method, Hedonic Pricing, and Defensive Expenditures (Revealed vs. Stated Preferences).

Hotelling’s Rule

In an efficient market, the net price (scarcity rent) of non-renewable resources must rise at the same rate as the interest rate.

Hartwick Rule

To achieve long-term sustainability, scarcity rent should be reinvested into capital expansion for future generations.

Allocative Efficiency Condition

Achieved when Marginal Social Benefit (MSB) equals Marginal Social Cost (MSC): MSB = MSC. In the absence of externalities, this simplifies to MB = MC.

Coase Theorem

Optimal outcomes for externalities can be reached via negotiation if transaction costs are low and property rights are well-defined

Cap and Trade

A system where the government caps total emissions and issues tradable permits, allowing the market to reduce pollution at the lowest cost.

Cost-Benefit Analysis (CBA) Issues

prediction biases, difficulty discounting long-term effects, and potential manipulation.

Intergenerational Equity Challenges

Future generations lack voting power and representation; environmental benefits are often delayed while costs are immediate.