ECON MIDTERM

Question 1

Law of supply

Answer 1

an increase in price leads to an increase in supply (and vice versa)
Function = Qs = f(P), reflects Marginal Private Cost

Question 2

Law of demand

Answer 2

an increase in price leads to a decrease in demand (and vice versa)
Function = Qd = f(P)

Question 3

Market equilibrium

Answer 3

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

Question 4

Consumer surplus

Answer 4

difference between consumer’s willingness to pay and what price consumer actually pays
(area under demand curve)

Question 5

Producer surplus

Answer 5

difference between producer’s willingness to supply and what price producer actually receives
(area above supply)

Question 6

total/economic/welfare/social surplus

Answer 6

consumer surplus + producer surplus

Question 7

Market failures

Answer 7

inefficient distribution of goods due to other incentives, no equilibrium
To solve –> government intervention (taxes/subsidies)

Question 8

Externalities

Answer 8

• 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)

Question 9

Public goods

Answer 9

non-excludable + non-rival goods → lead to under-provision due to free-riders (ex. Clean air)

Question 10

Goods spectrum

Answer 10

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

Question 11

Albedo effect

Answer 11

reflectivity of Earth’s surface → lower albedo (less reflection, more absorption) accelerates warming

Question 12

Tipping points/Feedback loops

Answer 12

threshold that triggers self-reinforcing changes in climate system (ice sheet melting increases absorption of carbon)

Question 13

How do we know CO2 concentrations are caused by human activity?

Answer 13

Isotopic composition of carbon in atmosphere (shows an increase in emissions from burning of fossil fuels/industrial activities)

Question 14

Different degree scenarios

Answer 14

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

Question 15

Climate sensitivity

Answer 15

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

Question 16

Emissions pathways

Answer 16

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

Question 17

Climate vs weather

Answer 17

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)

Question 18

Link between economic activity and emissions

Answer 18

economic growth –> Co2 emissions –> climate change –> economic impact –> environment policies reduce emissions –> economic growth…

Question 19

“getting off fossil fuels” supply theory

Answer 19

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)

Question 20

“getting off fossil fuels” demand theory

Answer 20

As more renewables are introduced, renewables price decreases + quantity increases → fossil fuels price decreases + demand increases

Question 21

Total costs of reducing GHG emissions

Answer 21

increase at an increasing rate

Question 22

Total benefits of reducing GHG emissions

Answer 22

increase at a decreasing rate

Question 23

Free riding

Answer 23

When you benefit from a good without having to pay for it (leads to under-provision in a competitive market)

Question 24

Coase theorem

Answer 24

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

Question 25

measuring benefits for market goods

Answer 25

use market prices (willingness to pay)

Question 26

measuring benefits for non-market goods

Answer 26

revealed preference method = observing people’s behavior to infer valuation stated preference method = survey what people are willing to pay

Question 27

Monetization of benefits

Answer 27

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!

Question 28

Estimating costs

Answer 28

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

Question 29

Value of Statistical Life (VSL)

Answer 29

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

Question 30

Present value (PV or NPV)

Answer 30

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

Question 31

Aggregate

Answer 31

total demand or total supply (adding up all individual data)

Question 32

Benefit cost analysis

Answer 32

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)

Question 33

Criterion for BCA

Answer 33

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

Question 34

Low discount rate

Answer 34

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)

Question 35

High discount rate

Answer 35

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)

Question 36

Descriptive (opportunity cost) approach

Answer 36

alternative to discount rate --> investing resources according to real rates of return + discount rate should be determined by the opportunity cost of capital

Question 37

Prescriptive (normative) approach

Answer 37

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

Question 38

Social Discount Rate

Answer 38

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)

Question 39

Uncertainty and discounting

Answer 39

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

Question 40

Social Cost of Carbon (SCC)

Answer 40

- 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))

Question 41

Damage functions

Answer 41

way to relate temperature to economic damages/GDP (Quadratic functions of global mean temperature)

Question 42

Top Down approach

Answer 42

using historical data to estimate broad relationships between temperature and economic output (macro, wide)

Question 43

Bottom Up approach

Answer 43

focusing on specific sectors/regions to estimate climate impacts (micro, zoomed in)

Question 44

Climate change is nonlinear because

Answer 44

- Small temperature increase = huge disproportionate impact - Damages accelerate as temperature increases - Heterogeneous damages = effects of climate change vary across different groups/places

Question 45

Adapting to climate change

Answer 45

flattens the relationship between temperature and the outcome of interests

Question 46

current estimates (topdown/bottomup)

Answer 46

don't take into account adaptations --> biased/incorrect (Ideal estimate takes into account full effect on welfare (benefit + cost of adaptation))

Question 47

Long difference approach

Answer 47

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)

Question 48

CARE (climate adaptive response estimation)

Answer 48

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)

Question 49

Marginal Social Cost

Answer 49

MSC = MPC + MEC