review session - econs330
TRANSCRIPT
Review Session - EconS330
THE DERIVATION OF NET BENEFITS
Introduction
1
THE DERIVATION OF NET BENEFITS
Comparing Bene�ts and Costs Across Time
How can we make choices when B and C may occur atdi¤erent points in Time?
Static E¢ ciency
An allocation satis�es the static e¢ ciency criterion if theNB is maximized
THE DERIVATION OF NET BENEFITS
Static E¢ ciency
First Equimarginal Principle or E¢ ciency equimarginalPrinciple
Net Bene�ts are maximized when MB=MC
Pareto Optimality
If no other Feasible allocation could bene�t some peoplewithout any deleterious e¤ects on at least one other person.
THE DERIVATION OF NET BENEFITS
Valuing The Environment �Methods�
Problems: Non-Market Values
TWP = Use Value + Option value + Non-use value
Market PriceSimulated Markets
Travel CostHedonic Property ValueHedonic Wage valueAvoidance Expenditures
Contingent Valuation
Attribute –Based Models:Conjoint Analysis Choice ExperimentsContingent Experiments
THE DERIVATION OF NET BENEFITS
Valuing The Environment �Methods�
Tangible versus Intangible Bene�ts:
Tangible Bene�ts: are those that can reasonable be assigneda monetary valueIntangible Bene�ts: are those that cannot be assigned amonetary value, either because the data are not available orreliable enough or because it is not clear how to measure thevalue even with data.
THE DERIVATION OF NET BENEFITS
Externalities as a Source of Market Failure
Property Rights:
1 Exclusivity: all bene�ts and costs should accrue to the owner2 Transferability: PR should be transferable from one owner toanother
3 Enforceability: PR should be secure from involuntary seizureby others
When well-de�ned property rights are exchanged, as in marketeconomy, this exchange facilitates e¢ ciency.
THE DERIVATION OF NET BENEFITS
Property Rights
Other Property Rights Regimes:
State Property Regimes: The government owns and controlthe propertyCommon-property Regimes: The property is jointly owned andmanaged by a speci�c group of co-ownersOpen-access Regimes: no one owns or exercise control over theresources
Tragedy of the Commons: Nobody is willing to conserve thenatural resource
THE DERIVATION OF NET BENEFITS
Externalities
An externality exists whenever the welfare of someagent, either a �rm or household, depends not only onhis or her activities, but also on activities under thecontrol of some other agent.
Positive Externality (external economy)Negative Externality (external diseconomy)Pecuniary Externality
We can draw a number of conclusions about marketallocations of commodities causing pollution externalities:
The output of the commodity is too largeToo much pollution is producedThe prices of products responsible for pollution are too lowAs long as the costs are external, no incentives to search waysto yield less pollution per unit of output are introduced by themarketRecycling and reuse of the polluting substances are discouragedsince release into the environment is so ine¢ ciently cheap
THE DERIVATION OF NET BENEFITS
Negative Externality
THE DERIVATION OF NET BENEFITS
Positive Externality
THE DERIVATION OF NET BENEFITS
Public Goods
Public goods have two characteristics:
1 Nonrival2 Nonexclusive good
Free-rider: Someone who derives the value from acommodity without paying an e¢ cient amount for its supply
Imperfect Market Structure
THE DERIVATION OF NET BENEFITS
Private resolution through Negotiation
Environmental problems arise when property rights are illde�ned
Ronald Coase (1960)Problems?
THE DERIVATION OF NET BENEFITS
Dynamic E¢ ciency
What legacy should earlier generations leave to later ones?
"A Theory of Justice" Rawls (1971)Dynamic e¢ ciency criterion: the e¢ cient allocation is theone that maximizes the present value of the net bene�tsDynamic e¢ ciency balances present and future uses of adepletable resourceHartwick�s Rule: If all scarcity rent is invested in capital,then a constant level of consumption could be maintained inperpetuity.
THE DERIVATION OF NET BENEFITS
Dynamic E¢ ciency
THE DERIVATION OF NET BENEFITS
The Allocation of Depletable and Renewable Resources
Three separate concepts are used to classify the stock ofdepletable resources:
1 Current Reserves: are known resources that can pro�tablybe extracted at current prices
2 Potential Reserves: The amount of reserves potentiallyavailable depends upon the price people are WTP for thoseresources
3 The Resource Endowment: It represents an upper limit onthe availability of terrestrial resources
THE DERIVATION OF NET BENEFITS
The Two-Period Model Revisited
THE DERIVATION OF NET BENEFITS
The Two-Period Model Revisited
THE DERIVATION OF NET BENEFITS
The Two-Period Model Revisited
Increasing Marginal Extraction Cost (MEC)
THE DERIVATION OF NET BENEFITS
The Two-Period Model Revisited
THE DERIVATION OF NET BENEFITS
Discussion
What is the Coase theorem, and when is it likely to be helpfulin leading a market with externalities to provide the sociallye¢ cient level of output?
What is a public good? How can one determine the optimallevel of provision of a public good?
Explain why cigarette smoking is often described as a goodwith negative externalities. (b) Why might a tax on cigarettesinduce the market for cigarettes to perform more e¢ ciently?(c) How would you evaluate a proposal to ban cigarettesmoking? Would a ban on smoking necessarily beeconomically e¢ cient?
What are the main di¤erences between Constant MEC andIncreasing MEC in a two period model revisited?
THE DERIVATION OF NET BENEFITS
Discussion
Summarize the Theory of Justice develop by John Rawls(1971)
Why does an otherwise competitive market with a negativeexternality produce more output than would be economicallye¢ cient?
Why does an otherwise competitive market with a negativeexternality produce more output than would be economicallye¢ cient?
How might an emissions fee lead to an e¢ cient level of outputin a market with a negative externality?