CONCISE AEM 2500 FLASHCARDS

WTP on a Graph

The area under the demand curve from Q = 0 up to the quantity in question.

TVC on a Graph

The area under the marginal cost (MC) curve from Q = 0 up to the given quantity (Q).

Consumer Surplus on a Graph

The area between the demand curve and the actual price paid by consumers, from Q = 0 up to the quantity traded.

Producer Surplus on a Graph

The area between the actual price received by producers and the supply curve, from Q = 0 up to the quantity traded.

DWL on a Graph

The area between Demand and Supply curves from Qd to Q s.

Coase Theorem Efficient Allocation

Total MB = MC.

VSL

(WTP per person × population)/L

VSL Worth?

Policy worth it if: Benefits (L × VSL) > Costs.

First Equimarginal Principle

Net benefits are maximized when: Social Marginal Benefit (SMB) = Social Marginal Cost (SMC).

Second Equimarginal Principle

The cheapest way to reach a goal is when the marginal costs of all possible means of achievement are equal.

Discounting

PV=FV​/((1+r)^t)

Dynamic Efficiency

• If r = 0 (no discounting)

  • Future is valued equally as present.

  • Split the stock evenly: each period gets the same share.

• If r > 0 (positive discount rate)

  • Present is valued more than the future.

  • Allocate more to today, less to the future.

Marginal User Cost

Marginal User Cost (MUC)

Definition: MUC=P−MC

It’s the scarcity rent: the extra value because the resource is limited.

Efficient Allocation Rule

• Must balance Present Value of Marginal Benefits (PV[MB]) between periods.

• If PV[MB] today > PV[MB] future → shift more to today.

• If PV[MB] equalized → efficiency achieved.