ENV ECON FINAL

Steps in Solving Net Value Open Access Problems:

Step 1: Find individual value using V = MC

Step 2: Find total value using Q X V = TV

Step 3: Find total cost using Q X MC = TC

Step 4: Find Net Value: TV - TC

4 tenets of Well Defined Property Rights:

 Universal or comprehensive

2. Exclusive (focus of environmental economics)

3. Transferrable

4. Securable and enforceable

What is the Opportunity Cost?

Opportunity cost is the value of the next best alternative you give up when making a choice.

• This is the true economic measure of the cost of any activity

True/False: Economists believe that the market solves all problems

Partially True: markets can allocate resources in the best and most efficient manner, and result in the largest possible welfare to society. Only exist under certain conditions, theoretical concept

True/False: Economist always believe that creating a market is the solution when markets are missing

Partially True: Tradable permits and environmental taxes are policy options that are advocated for that attempt to create markets

True/False: Economist only focus on market prices

False: Policy goals must take benefits and costs into account

Economic Efficiency

when net benefits (total benefits - total costs) derived from an allocation of resources is maximized

Total Willingness to Pay (WTP)

 total monetary value society places on the consumption of some amount of a product

• In other words: total benefit

• Measured as area under the demand curve at the quantity evaluated

Net Benefits

CS + PS - EC

Pareto Efficiency

A situation is Pareto efficient when no one can be made better off without making someone else worse off.

Pareto Improvement

A change is a Pareto improvement if it makes at least one person better off without harming anyone else. Once no more Pareto improvements are possible, you've reached Pareto efficiency.

Problem with Pareto efficiency

 its is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources

No result of equal well being

The Compensation Principle

This is the Kaldor-Hicks Efficiency criterion (also called the Compensation Principle).

The Rule: If the gains to the winners are large enough to fully compensate the losers — and still have something left over — then the new state is considered more efficient and should be selected, even if compensation doesn't actually occur

Necessary Conditions for Efficient Market:

1. Perfectly competitive markets

2. Perfect Information

3. Markets are complete (focus of environmental economics)

Failure of exclusivity leads to 3 primary market failures:

1. Externalities 

• Coal fired or electricity production

2. Public goods

• Public forest, preservation

3. Open access

• Marine fisheries

How is environmental damage represented in economics?

• Externality: results when the actions of one individual or firm have a direct, unintentional or uncompensated effect on the well-being of other individuals or profits of other firms.

Costs associated with negative externalities:

• Private Costs (PC): supply curve = private marginal cost curve

  • Costs that show up on profit loss statements and must be paid by the firms (e.g. production costs)

  • Costs borne by consumers to obtain a market good

• External Costs (EC):

  • Costs that do not show up on a firm’s balance sheet and are borne by society rather than firm

  • Costs to society as a result of a consumer’s economic choice

  • Area between social cost and private cost curves

• Social Cost (SC):

  • Sum of Private Costs and External Costs, SC = PC + EC

Public Goods

 Non-rival: your consumption does not affect others consumption

• Rivalrous: when you consume others cannot consume

2. Non-excludable: can’t exclude someone from using the goods

• Excludable: someone has control over the use of the good (e.g. car)

Free riding

• Failure to contribute fully to the provision of a public good according to your demand for the good

Policy Options to correct free-riding problem:

• Taxes: divide cost equally, treats everyone as a consumer

  • Ex: national defense

• Altruism: raise funds by asking for donations, likely to have many free riders

  • Ex: Public Radio

• Privatize It: construct barrier to entry and limit entrance to those willing to pay

  • Ex: private garden

Congestion

externality of consumption inflicted only on other consumers of the good

Why are public good vertically summed instead of horizontally?

• Sum of the individual WTP to make an aggregate demand curve (sum of WTP for all individuals)

Open Access Resources

a resource that is open to uncontrolled access by all (common property)

Rival: The same unit of the good cannot be consumed by more than 

Non-Excludable

Tragedy of the commons: marine fisheries

Diminishing marginal returns

as the number of people using a resource increases, the benefits from using that resource increase at slower rates.

Point Source

single, identifiable source of pollution

5 Problems with standards

1. Setting the standard: inefficient

• Try to balance MAC = MB and get an A*

  • This requires full info on the costs and benefits of abatement

2. Uniformity of standard

• Standards tend to be uniform due to fairness and regulatory burden

• 2 locations with different MB curves

  • Efficient standard is separate standards for each location
    

3. Standards with the equimarginal principle

• When pollutants mix, cost-effectiveness arises from equimarginality

  • All sources must be controlled as to have the same MAC

• Creates situations where some abate more, some less

  • Regulators would have to know the MAC for each and every source of pollutant to achieve equimarginality

4. Lack of incentives

• Once standard is met, no incentive to further abatement (short term)

• No investment in technology for pollution abatement (long term)

5. Enforcement: penalties aren't enough to ensure compliance

Direct/Revealed Observed Valuation Method

market prices

Direct/Preference Stated Valuation Method

contingent valuation

Indirect/Revealed Observed Valuation Method

Travel cost method, hedonic method, defensive expenditures

Indirect/Stated

choice experiments/models

travel cost method

The Travel Cost Method is a revealed/observed preference technique used to estimate the economic value of non-market environmental goods —

ex: recreational sites like national parks, forests, lakes, and beaches.

hedonic method

The Hedonic Pricing Method is a revealed/observed preference technique that extracts the implicit value of environmental attributes from market prices of traded goods — most commonly real estate and labor markets

Existence value is a type of:

non-use value

Describe the nine (9) steps to conduct a benefit cost analysis

1. specify alternatives

2. define stakeholders

3. identify impacts

4. predict impacts

5. monetize impacts

6. discount rate to present value

7. compute net present value

8. perform sensitivity analysis

9. make a reccomendation

Name and discuss three things that can we vary to conduct a sensitivity analysis in a benefit

cost analysis

1. discount rates

2. project timelines and lifespan

3. key cost and benefit estimates

Explain the fundamental finding of the Coase Theorem

If property rights are clearly defined, transaction costs are zero, and parties can bargain freely, then private negotiation will always lead to an economically efficient outcome — regardless of how property rights are initially allocated

Why doesn’t the coase theorem key finding hold if environmental justice issues are present?

Environmental justice conditions systematically violate every one of these assumptions.

• Wealth disparities break the WTP/WTA equivalence. Power asymmetries corrupt bargaining.

• Historical injustice delegitimizes the starting allocation.

• And some harms simply cannot be bought off with money

Describe three potential biases associated with contingent valuation (CV) surveys. How

would you expect them to bias answers?

1. Hypothetical Bias: Because CV surveys are hypothetical with no real payment required, respondents face no budget constraint. This causes them to overstate their true WTP, since saying they would pay a high amount costs them nothing

2. Strategic Bias: Respondents deliberately overstate their WTP to influence the policy outcome.

3. Embedding Effect: Answers are strongly affected by context and people may include WTP for something other than what the survey ask

A firm faces either a pollution standard or a tax set to achieve the same emissions reduction. Which policy does the firm prefer and why?

The firm prefers the standard over the tax b/c…

Under the Standard: The firm abates exactly Q* and pays only its abatement costs — the area under the MAC curve from 0 to Q*.

Under the Tax: The firm abates Q* AND pays the tax on every remaining unit of pollution it still emits. Total cost = abatement costs + tax payments on residual emissions.

How do the relative shapes of MB and MC curves determine whether a tax or tradeable permit system is the preferred policy instrument?

The preferred policy depends on the relative steepness of the Marginal Benefit (MB) and Marginal Cost (MAC) curves

MAC is steeper than MB → Tax is preferred

MB is steeper than MAC → Permit is preferred

Advantages of a Tax Policy

• incentive to update abatement technology

• revenue recycling

• efficient if full information

• flexible for firms

Disadvantages of a Tax Policy

• disliked by firms

• doesn't assure desired level of abatement

Contingent Valuation Process

4 steps:
1. identify environmental quality to be changed
2. identify respondents to be approached and sampling prodecure
3. survey questionnaire
4. analysis of results and estimate aggregate values

Advantages of Permit Policy

• more desired by firms

• flexibility for firms

• incentive to update abatement technology

• guaranteed to reach desired abatement

Disadvantages of Permit Policy

• price can fluctuate if abatement levels do go down

• deciding who gets initial rights

• deciding price of permits

• need clear trading rules

Indirect/Stated preference Method

Choice Experiments, rank alternatives instead of a direct value statement of a good

Compensating differentials

Characteristics associated with wages or properties reveal the premium value to those workers to work those jobs or for someone to buy a house

can be due to increased danger of a job

can be due to a public park or natural spaces near a property