Chapter 5 Flashcards
How do we measure the marginal net benefit of producing a resource?
We measure the marginal net benefit of producing a resource by marginal benefits minus marginal costs.
- What is the normal shape of the marginal net benefit function?
Downward Slope
- At what point are total benefits normally maximized in a market?
Total benefits are normally maximized when marginal net benefits are equal to zero.
What is a discount rate?
The annual rate at which future benefits or costs are discounted relative to current benefits or costs
What is a present value?
the current value of a stream of future costs or benefits
- How is discounting used to determine the efficient allocation of a resource over time?
Discounting rate is used to determine the efficient allocation by showing when resource consumption is most favorable (now or for future use).
What are user costs?
Costs that we impose on the future by using resources today
How do we determine the efficient allocation of a resource over two time periods? Graphically
Graphically it is when the MNB1 and PV[MNB2] lines intersect
How do we determine the efficient allocation of a resource over two time periods? Numerically
MNB1=PV(MNB2),
What is a resource depletion tax?
A tax imposed on the extraction or sale of a natural resource
How can resource depletion tax be used to increase the temporal efficiency of a resource?
By requiring for the user costs to fully be internalized at the optimal quantity.
Is government intervention always necessary for an efficient allocation of a resource over time?
Not always necessary, especially if the period until expected resource exhaustion is relatively short.
- How will different discount rates affect the way a resource is allocated over time?
At a discount rate of zero: future net benefits are given exactly the same value as if they were current net benefits.
At a discount rate above zero: we favor present consumption over future consumption to some degree
What is Hotelling’s rule?
states that in equilibrium the resource net price (defined as the price minus extraction costs) must rise at a rate equal to the rate of interest.
When is it “optimal” to deplete a nonrenewable resource as soon as possible?
the higher the discount rate, the shorter the time frame
