All Notes Flashcards
What are the conditions for a free market to produce an efficient outcome?
Markets exist for all goods and services
All markets are perfectly competitive
Property rights are fully assigned in all resources
No externalities exist
Define static efficiency?
Allocation of resources lead to a maximisation of economic surplus
Give examples of market failure?
Absent Property Rights Externalities Public Goods Government Failure Imperfect Market Structure
What are the 3 strucutres required for property rights to be efficent?
Exclusivity - All benefits are accrued to the owner
Transferability - Should be transferable to others
Enforceability - Should be secure from seizure or encroachment
What are the 5 types of property rights?
Private Property Regimes - Individuals hold entitlement
State Property Regimes - Governments own all property
Common Property Regimes - Property jointly owned and managed by a specific group
Common Pool Resources - Non exclusivity and diversity
Open Access Regimes - No one owns the resources
What are the three types of externalitiy?
Negative: Costs to a third party : Pollution
Positive: Benefits to a third party: Airport construction
Pecuniary: External effect comes from a change in price
What is the Coase Theorem?
When negotiation costs are negligible and affected parties can freely negotiate an efficient allocation will be reached
What are some methods of Government Failure?
Rent Seeking - Resources are used in lobbying government for protection rather than efficency
Define Dignity?
If an item does not have a price, there is no equivalent hence dignity.
A project will go ahead where the CBA shows:
The NPV = Benefits - Costs - Environmental Costs >0
What are the four costs?
Use Value (UV) - The cost that arises from the use of the service Existence Value (EV) - The cost that arises from the services existsance Option Value (OV) - The cost of the willingness to pay to preserve availability of a good for future use Quasi Option Value (QOV) - The willingness to pay to not commit to an irreversible commitment
How does the Kaldor and Hicks valuation method work?
Preferences of individuals through willingness to pay for a benefit /accept compensation for a cost
What is Pareto optimality?
You can not make somebody better off without making somebody worse off
Name some critics of environmental CBA.
Scitovsky (1941) - Contradiction in hypothetical compensation logic
Samuelson (1942) - Marginal utility of income is not constant
Lipsey / Lancaster (1956) - Second best theorem
Arrow (1951) – “Impossibility theorem”. We cannot reasonably go from individual preferences to a social ordering of states
What is the formula for a CBA?
Sum[WTPG(1+S)^-t] - Sum[WTPL(1+S)^-t >0
S = Discount Rate
What is the formula for a CBA if the loosers have property rights?
Sum[WTPG(1+S)^-t] - Sum[WTAL(1+S)^-t >0
S = Discount Rate
How is risk treated in a CBA?
The PVNB is weighted by its probability of occurrence.
EPVNB = Pi*PVNB.
What is discounting?
Reducing the value of future assets
A high discount rate means future assets have a low value
What is the formula for a discount factor?
W = 1/(1+s)^t
Why could discounting be classed as rational?
Time preference: Pure impatience, Risk of death, Risk and uncertainty, Diminishing Marginal Utility
Productivity of Future Capital:
Next generation will be even more advanced and richer so do not need our help
What are some critiques of discounting?
Not enough info for consumers to maximise utility
Interests may conflict with those of society
Society lives longer than individuals
Productivity of Capital:
Will the definitely be better in the future?
Name some methods of environmental Valuation.
Stated Preference: Methods to elicit respondents (WTP) when the value is not observable
Revealed Preference: Methods based on actual observable choice from which values can be inferred
What is contingent valuation?
A survey based on stated preference techinque.Can be distributed by face to face, mail or telephone.
Why is there disparity between WTP and WTA?
WTP is less than WTA as:
Individuals view changes from the normal
Gains and losses are subject to diminishing returns
Value function is steeper for losses than gains