Class Notes

Question 1

A public good is…

Answer 1

one that is non-rival and non-excludable

Question 2

Non-Rival good

Answer 2

There is 0 marginal cost of an extra person consuming the good

Question 3

Non-Excludable Good

Answer 3

It is impossible, or very costly, to prevent people from consuming the good

Question 4

Are most public goods entirely non-rival and non-excludable?

Answer 4

No, most actually fall somewhere along a spectrum.

Question 5

To calculate the demand for rival goods…

Answer 5

Derive market demand by summing horizontally.

• For a given P, how many units will be demanded?

Question 6

To calculate the demand for non-rival goods…

Answer 6

derive market demand by summing vertically

• For a given Q, what is the total marginal benefit?

Question 7

What are the three main ways to correct an externality?

Answer 7

1. ) Taxation
2. ) Regulation (“command and control”)
3. ) Private (Coasian) solutions

Question 8

What ways can regulation be used to correct an externality?

Answer 8

• Ideally, could set Q* if you knew it
• Performance Standards (emission restrictions)
• Design Standards (technology restrictions)
• Bans

Question 9

A private (Coasian) solution to correcting a negative externality?

Answer 9

Assign property rights, and it doesn’t matter who has the initial right. If the parties are able, they will negotiate to the optimal solution.

Question 10

What conditions are necessary for a coasian solution to be possible?

Answer 10

• Requires negotiation/transaction costs to be low
• Property rights must be well defined
• Exclusion must be possible or you will have free riding

Question 11

When does an externality occur?

Answer 11

An externality occurs when costs or benefits affect people not directly involved in a market transaction. That is, a cost or benefit spills over to a 3rd party.

Question 12

When does a production externality occur?

Answer 12

A production externality occurs when extra costs or benefits accrue to 3rd parties in the consumption of a good.

Question 13

When does a negative externality occur?

Answer 13

A negative externality occurs when the externality is an extra cost that affects parties outside the market.

Question 14

When does a positive externality occur?

Answer 14

A positive externality occurs when the externality is an extra benefits that affects parties outside the market.

Question 15

A Pigouvian Tax (or Pigouvian subsidy)

Answer 15

is a tax that is set equal tot eh externality, thereby bring the market to the optimal production level.
- It “internalizes” the externality

Question 16

How can you find the pigouvian tax (or subsidy)?

Answer 16

You can find the Pigouvian tax (or subsidy) by determining the MEC (or MEC) at the socially optimal point

Question 17

The future value of $X in n years with an annual interest rate of I is:

Answer 17

$X * (1+i)^n

Question 18

Inflation is when…

Answer 18

the cost of living rises, so money isn’t worth as much

Question 19

Nominal dollars are also called…

Answer 19

current dollars - they are what is actually occurring at the time

Question 20

Real Dollars are also called …

Answer 20

constant dollars - they are adjusted for inflation

Question 21

Social Benefit Cost Analysis is a tool that uses dollars to compare…

Answer 21

how much people benefit from a change (i.e. are willing to pay) to what people must give up from the change (i.e. opportunity cost)

Question 22

What is the Criterion we use in social benefit-cost analysis?

Answer 22

Kaldor-Hicks = a policy should be undertaken if the gains to the winners outweigh the losses to the losers. This occurs when the benefits exceed the costs.

Question 23

Kaldor-Hicks Compensation

Answer 23

An allocation is preferable if the gains to the winners outweigh the losses to the losers, so that it would be theoretically possible for the winners to compensate the losers for their losses and still be better off.

Question 24

Three Main Ways to Correct an Exterality

Answer 24

1. ) Taxation
2. ) Regulation (“command and control”)
3. ) Private (Coasian) solutions

Question 25

Steps of a BCA

Answer 25

• Specify the alternatives, relative to “do nothing.”
• Decide who has standing (whose costs and benefits count)
• Identify costs and benefits
• Value costs and benefits
• Discount Costs and Benefits
• Performa a sensitivity analysis
• Recommend option with highest net benefit.

Question 26

Travel Cost Method

Answer 26

Typically used for recreational sites. The “price” of visiting a recreation site is the entry fee as well as the travel costs related to the visit (transportation, lodging, time, etc.) By observing the costs of different travelers a researcher can derive an average demand curve.

Question 27

What’s the zonal approach of the Travel Cost Method?

Answer 27

Gather data on where visitors come from; group them in to zones. Then calculate average cost to travel from that zone .

Question 28

Hedonic Studies

Answer 28

You can decompose an item into its characteristics, and use variation in those attributes to value them. Use regression analysis to control for all observable characteristics, including the attributes of interest.

Question 29

NOAA panel recommendations for Contingent Valuation studies…

Answer 29

• Use referendum format
• Face-to-face interviews
• Detailed, accurate descriptions; carefully pretested questionanaire
• Dichotomous choice (yes/no) question with specific price (not open-ended)
• include “no answer” option
• reminders of budget constraint and competing expenditures
• Follow up with reasons for responses.

Question 30

The future value of $X in n years with an annual interest rate of i is:

Answer 30

$X * (1 + i)^n

Question 31

$Y after specified discounting periods=

Answer 31

$X today * (1+r)^n

Question 32

Discount Rate

Answer 32

society’s time preference for money

Question 33

Constant Exponential Discounting: PV of a in n years

Answer 33

a/((1 + r)^n)

Question 34

the present value of Y dollars n years in the future is …

Answer 34

$Y / (1 + i )^n

Question 35

risk averse utility function

Answer 35

ln(w)