ECON MIDTERM Flashcards
Law of supply
an increase in price leads to an increase in supply (and vice versa)
Function = Qs = f(P), reflects Marginal Private Cost
Law of demand
an increase in price leads to a decrease in demand (and vice versa)
Function = Qd = f(P)
Market equilibrium
When quantity supplied = quantity demanded
Solved by equating both functions (Qs = Qd)
Maximizes consumer + producer surplus (but market failure exists)
Does not maximize Marginal External Cost
Consumer surplus
difference between consumer’s willingness to pay and what price consumer actually pays
(area under demand curve)
Producer surplus
difference between producer’s willingness to supply and what price producer actually receives
(area above supply)
total/economic/welfare/social surplus
consumer surplus + producer surplus
Market failures
inefficient distribution of goods due to other incentives, no equilibrium
To solve –> government intervention (taxes/subsidies)
Externalities
- when actions of one individual (or firm) have direct, unintentional, and uncompensated effect on the well-being of other individuals or the profits of other firms
- costs/benefits not reflected in market price → lead to inefficiency because private market participants do not account for the full social costs/benefits of their actions (ex. pollution)
Public goods
non-excludable + non-rival goods → lead to under-provision due to free-riders (ex. Clean air)
Goods spectrum
Non-excludable = you can’t be prevented from using the good
Excludable = I can be prevented from using a certain good
Non-rival = my consumption of the good does not limit anyone else’s quantity/quality of the good
Rival = me using a good reduces others’ availability/quality
Albedo effect
reflectivity of Earth’s surface → lower albedo (less reflection, more absorption) accelerates warming
Tipping points/Feedback loops
threshold that triggers self-reinforcing changes in climate system (ice sheet melting increases absorption of carbon)
How do we know CO2 concentrations are caused by human activity?
Isotopic composition of carbon in atmosphere (shows an increase in emissions from burning of fossil fuels/industrial activities)
Different degree scenarios
At 1.5 C → all warm water coral reefs shrink and threatened to go extinct + permafrost thaw + food supply becomes unstable
At 2 C → wildfires + desertification (land cannot support vegetation)
At 3 C → ocean life suffers widespread losses + crops yields decline in tropical regions
At 4.5 C → (catastrophic) food supply suffers worldwide + ocean life losses in all ocean environments + wildfires even more severe
Climate sensitivity
The long term equilibrium temperature change as Co2 atmospheric concentration doubles from pre-industrial levels (estimates = 1.5-4.5) → how much will mean global temperature change if we double levels?
IPCC AR6 says 3, between 2-5
Emissions pathways
Different scenarios/trajectories of how the world might play out (future emissions/temperature increase)
SSPs (Shared Socioeconomic Pathways) → provide different narratives of global development, cooperation, and challenges alongside GHG emissions
Climate vs weather
Climate = the potential possibilities of what weather could be (long-term average of weather patterns)
Weather = the realization of one of those possibilities (short-term atmospheric conditions)
Link between economic activity and emissions
economic growth –> Co2 emissions –> climate change –> economic impact –> environment policies reduce emissions –> economic growth…
“getting off fossil fuels” supply theory
If fossil fuels become more scarce → supply decreases → drive up equilibrium and other alternatives will become more cost competitive
BUT technological improvements → supply/quantity increase (shift curve outwards)
“getting off fossil fuels” demand theory
As more renewables are introduced, renewables price decreases + quantity increases → fossil fuels price decreases + demand increases
Total costs of reducing GHG emissions
increase at an increasing rate
Total benefits of reducing GHG emissions
increase at a decreasing rate
Free riding
When you benefit from a good without having to pay for it (leads to under-provision in a competitive market)
Coase theorem
In the case of an externality:
If:
Property rights are clearly defined
There are no transactions costs
There aren’t too many parties involved
Then:
Private parties will bargain to achieve the socially optimal solution
measuring benefits for market goods
use market prices (willingness to pay)
measuring benefits for non-market goods
revealed preference method = observing people’s behavior to infer valuation
stated preference method = survey what people are willing to pay
Monetization of benefits
putting a value on environmental damages (key to having common measuring stick but where BCA gets attacked a lot)
+ measuring benefits is difficult but not including a benefit implicitly assumes that benefit is zero!
Estimating costs
The Survey Approach
Involves asking polluters about their control costs
Drawback: people lie (no incentive to tell the truth)
The Engineering Approach
Using engineering information to estimate the technologies available and the costs of purchasing and using those technologies
The Combined Approach
Combining both survey and engineering approaches
Value of Statistical Life (VSL)
metric used to quantify the benefits of reducing mortality risks (measured by estimating people’s willingness to pay for small reduction in mortality risk)
*Makes up the bulk of benefits usually
*NOT what you would pay to avoid certain death
*Can be measured empirically → evaluating trade offs individuals make when choosing to work in risky industries for higher wages
Present value (PV or NPV)
adding up the discounted/future costs and benefits over time
formula = PV(benefits) - PV(costs)
PV(benefits) = bt/(1+r)^t
PV(cost) = ct/(1+r)^t
Aggregate
total demand or total supply (adding up all individual data)
Benefit cost analysis
analysis used to maximize net benefits (economic efficiency)
–> helps in choosing among alternatives (apply this in daily decision making + any major regulation requires this analysis)
Criterion for BCA
Potential Pareto Improvement (PPI) (or Kaldor-Hicks criterion) → change in allocation of goods harms no one and benefits at least one person (no brainer)
Only adopt a project (vs. status quo) if net present value (NPV) of net benefits is positive → total benefits outweighs total costs
Low discount rate
places more value in the future +
long term approach + trying to save future generations from high damages while impacting present policies more (ex. High carbon tax)
High discount rate
places less value in the future + short term approach + trying to save the present population while letting future generations suffer from climate change damages (ex. Few climate regulations)
Descriptive (opportunity cost) approach
alternative to discount rate –> investing resources according to real rates of return + discount rate should be determined by the opportunity cost of capital
Prescriptive (normative) approach
alternative to discount rate –> unethical to discount the future generations (so use a low discount rate) but take into account that future generations will be wealthier
*distinguish between discount rates on goods vs. welfare of future people
Social Discount Rate
prescriptive approach, using the Ramsey equation
pure rate of time preference + (elasticity of the marginal utility of consumption)(expected per capita growth rate of consumption)
Uncertainty and discounting
It’s difficult to predict the future + interest rates could be different in the future + uncertainty in discount rate provides justification to use a lower discount rate
Social Cost of Carbon (SCC)
- MOST IMPORTANT NUMBER IN THIS CLASS
- SCC is an estimate of the economic damages that would result from emitting one additional ton of CO2 into the atmosphere (Co2 = benchmark but other greenhouse gasses are included)
- Used for: valuing the benefits of reducing climate change
- Calculated using IAMs
(Integrated assessment models = computer models that combine scientific and socioeconomic aspects of climate change to produce insights for decision making (3 main = DICE, FUND, PAGE))
Damage functions
way to relate temperature to economic damages/GDP (Quadratic functions of global mean temperature)
Top Down approach
using historical data to estimate broad relationships between temperature and economic output (macro, wide)
Bottom Up approach
focusing on specific sectors/regions to estimate climate impacts (micro, zoomed in)
Climate change is nonlinear because
- Small temperature increase = huge disproportionate impact
- Damages accelerate as temperature increases
- Heterogeneous damages = effects of climate change vary across different groups/places
Adapting to climate change
flattens the relationship between temperature and the outcome of interests
current estimates (topdown/bottomup)
don’t take into account adaptations –> biased/incorrect (Ideal estimate takes into account full effect on welfare (benefit + cost of adaptation))
Long difference approach
look at average temps/GDP growth from one past period and then average temps/GDP growth from now period (this captures adaptations but requires a lot of data)
CARE (climate adaptive response estimation)
Compare San Diego to Imperial Valley → we can tell SD will turn into IV so we actually don’t need all this data we can just use what we already have
(accounts for intensive/extensive margins but not technological advances)
Marginal Social Cost
MSC = MPC + MEC
