EXAM 1 Flashcards
rent
in situ value of a resoruce
rent seeking
efforts made by ppl to gain property rights over resourecs
what is nature in econ
provides stocks of natural capital
when combined with other inputs, produces goods and services
extractive use
removing from environment
non extractive use
using without removal
forests extractive uses
timber
forest non extractive use
recreation
flood control
co2 seq
biodiversity
fisheries extractive uses
food products
fisheries non extractive uses
rec
biodiversity
non use values
existence, option, bequest, stewardship
existence value
value of knowing that something beautiful or unique exists, whether or not you’re going to use it
value of knowing that the amazon rainforest exists
option value
value placed on having the ability to use something in the future
option of seeing the amazon rainforest
bequest value
value of leaving environemntal amenities for future generations of people
value of preserving amazon for children
stewardship value
value attached to a moral obligation to preserve environmental amenities
we should not cut down amazon
what is the value of a good or service
what a person is willing and able to pay to obtian the good or service
is willingness based on preference
yes
TF an individuals willingness to pay is always constrained by their willingness to pay
t
marginal willingness to pay WTP
amt of money a person is willing and able to pay to obtain an additional unit of the good
total WTP
amt of money a person is willing and able to pay for some units of a good
how do you get total WTP
summing up Marginal WTP
look at figure 1
what is the total willingness to pay for 3 units
81
look at figure 1
what is the marginal willingness to pay for 3 units
17
what does the area under the curve mean in figure 2
total willingness to pay
what is marginal willingness to pay in figure 3
height of curve at 3
diminishing marginal WTP
the more a person has consumed of a good, the less they are willing to pay for an additional unit
increasing total wtp
pay more for greater quantities of a good
prefers to have more of a good
on figure three why would the consumer not purchase more or less than 3 units
if marginal value of consumption is greater than the cost of purchasing theh good, the person will purchase additional units
the marginal value of consuming the 4th unit is less than the cost of purchasing the fourth unit
looking at figure 3, how much does the person pay for the good
3x17=51$
how much is this person willing to pay for three units of the good?
a+b
why might people have different marginal WTP
different preferences, different ability to pay
if same perosn: diff time or diff information
you get aggregate curves from different individuals tf
t
what is a public good
a shared good
is a persons enjoyment of a pure public good diminished by others consuming the good
no
ex. species preservation
what is aggregate demand for pure public goods
the vertical summation of individual demand curves
what is the aggregate demand for private goods
the horizontal summation of individual demand curves
what is the benefit that a person gets from something
what they are willing to pay for it, even though they may not have to
look at fig 4. what is the total WTP for G1 units
area a
fig 4. what is the total benefit that she recieves form consuming G1 units of the good
area a
fig 4. what is her total wtp for g2 units
area a+b
fig 4 what is the total benefit of consuming G2 units of the good
area a+b
fig 4 what is her wtp to increase her consumption from G1 to G2 units
b
cost
a forgone benefit
fig 4 what is the cost from going from G2 to G1 units
area b
fig 5. Two ppl a and b. the G is a pure public good.
What is the aggregate benefit of increasing from G1 to G2
2a+b
A= a
B= a+b
thinking about sequences of decisions over time and how to value these decisions
discounting
thinking about consumers willingness to pay for the sequence of consumptions of quantities
discounting
how to compare values that occur over time
dicsounting
converting future values to present values
discounting
is the benefit reciveved in the future the same as the benefit now?
no must discount
discount rate for present value. you recieve 100$ 1 yr from now. discount rate is 5%
present value = (future value) / (1 + discount rate)^time
x= (100) / (1+0.5) = 95.24
for discount rate larger time =
larger denominator =smaller present value
reasons for discounting future benefits and costs
CAN’T COMPARE BENEFITS AND COSTS AT UNEQUAL TIMES
1. capital market interest rates
- personal time preference
- discounting for future risk
nominal interest rates
observed rates
real interest rates
rates discounted by general inflation
TF the more impatient you are the higher the value you place on a benefit recieved in the future
F, lower value if more impatient
what is the present value for the sequence of payments in fig 6 if the discount rate is 4%
552.02
what are the two costs when producing a good
direct and opportunity costs
direct costs
need certian productive inputs liek labor, machinery, and raw material
costs of production includes what is paid to purchase these inputs
opportunity cost
value of something in its next most valueble use
example: being in classes opportunity cost is working
what is it called when theres a divergence in the firms private costs of production and the social costs of production
external cost
what is a negative externality
activity of some agent causes a loss to another without consent and without compensation
external cost
loss from negative externality
is climate change an externality problem
yes nc its global, long term, and uncertian
marginal cost
change in total cost resulting in one unit change in output
total cost
cost of producing some number of units of output
characteristic of increading total cost
costing more to produce a higher level of output
characteristic of increasing marginal cost
higher output = higher cost to produce more
do all industries have increasing marginal costs
no
technology def
collection of knowledge underlying the methods and machinery used to turn inputs into outputs
what is the basic effect of technological change
lower the cost of producing something
in fig 7, which is the marginal cost before technology vs after
MC1 is before MC2 is after
what is the reduction of total cost of producing q* in fig 7 when going from mc1 to mc 2
area a
a good or service is perfectly competitive when __
no firm can affect the price of output
what do firms do when they are perfectly competitive
choose its level of output so that the market prive is equal to its marginal cost
this means that the firms marginal cost function will tell us how much output it will supply for every possible prive
in fig 8. what is total revenue
area a+b
in fig 8 what is total cost
area b
in fig 8 what is the profit
area a
in fig 9 why doesn’t the firm produce more than q1 when the prive of its output is p1?
it would cost the firm more to prod the extra output than the price it gets for it in the market
aggregate supply
the horizontal summation of individual form supply curves
you get this from individual ppl
how is a decision statically efficient
if it maximizes the difference between the social benefits of the decision and its social costs in a single time period
MSC
marginal social cost
MSB
marginal social benefit
in fig 10, what is the efficient quantity of output
where lines intersect, q*
in fig 10 what is the total social beenfit of q*
a+b
in fig 10 what is the total cost of q*
b
in fig 10 what is the net social benefit of q*
a
in fig 11why isny q1 efficient instead of q*
net social benefit is lower at q1 instead of q*
fig 11 total social benefit of q1
a+b+d
fig 11 total social cost of q1
b+d+c
net social benefit of q1 fig 11
a-c
dynamic efficiency (intertemporal)
including all future costs and benefits
dynamic efficiency requires that a series of decisions________
maximizes the present value of the stream of net benefits
examples of how output will effect social benefits and costs
harvests from fisheries affects fish stocks in future
and timber
equation for present vlaue of net benefits
= net benefits in year zero + sum of the present values of all future net benefits
dynamic efficiency requires that we consider both ____
current net benefits of a decision and the effect of this decision on the present value of all future payoffs
marginal net benefit =
MCB - MCC - MUC
MCB
marginal current benefit
MUC definitino
marginal user cost
captures marginal effect on the present value of future net benefits from a decision made today
MUC can benefit if
A decision today increases future discounted net benefits
example: thinning a forest can increase the amount of marketable timber available in the future
if a decision about q0 has no effect on the future, what does MUC =
0
why are MCC and MUC added together (graphs)
todays output decision has present and future costs
resource rent
the value of a resource over and above what it costs to extract, process, and sell it
in situ pricce
value in nature
the in situ price of a resoruce is its (rent related)
marginal rent
if harvesting has a negative effect on the population, the MUC will bring the MCC in the positive or negative direction
positive, higher cost
fig 12 shows lobsters. what is the marginal lobster rent
.70, difference in y values
fig 12 shows lobsters. what is the total rent
.7 x 1.8 million (rectangle) = 1.26 million
is the marginal resoruce rent = marginal user cost when
efficient resource markets. if value differs then the market is inefficent
increasing production will do what to marginal resoruce rent
decrease it, no consideration for future
definition of dynamic efficiency
maximizing the present valye of the stream of net benefits
requires a discount rate
what does a postivie discount rate mean
shift benefits to the rpesent and costs to the future
are discount rates a social choice
yes
what are factors that go into the choice of discount rates
rates of discount determined in existing capital markets
uncertianty abt distant future
to what extend is it appropriate to discount the future net beenfits of ppl who don’t have vote in decision
sustainable development
development that meets the needs of the present without compromising the ability of future generations ot meet their own needs
human welfare is based on production using two kinds of capital
Nat resource capital
built capital
natural resoruce capital
specific natural resoruces and natural systems
fisheries, forests, water, ecossytems
built capital
human capital, produced capital
education, buildings, infastrcture
weak sustainability definition
value of TOTAL stock shouldn’t decline over time
individual components may decline in value if offset by increase in value of other components
weak sustainability, could cutting down a forest be replaced with a building and be weak sustainable
yes
does weak sustainability require that we sustain or preserve any particular natural resource
no
what does weak sustainability mean
natural resource capital and built capital are perfect substitutes in the production of human welfare
hartwick rule
allow efficient depletion of natural resources and invest the resulting natural resource rent in another capital to maintain the value of the total stock
how to deplete a resource sustainably
strong sustainability
sustainabiltiy requires that we maintian the value of the remaining stock of natural resource capital
maintian vlaue of capital, but now focus is on the value of the natural resource capital stock
weak and strong sustainability focus on maintaining _____
value
does strong sustainability allow you to substitute among different forms of capital
NO, substitution is weak sustainability
environmental sustainability
obligation to maintian physical flows of specific resources for future generations
problems with environmental sustainability
do we have to maintain all antural resources
what abt nonrenewable resources
how do we account for future production technologies and the preferences for future ppl
should you convert land for palm oil drilling
if the benefits outweigh the costs (if its efficient)
palm oil example of weak strong and envi sustainability
weak- if conversion doesnt reduce the value of the total capital stock. If value of flow of beenfits from preserved rainforest if offset by values of palm production
strong- same as weak because natural asset is being coverted into another natural asset
envi- dont convert bc natural resource is being depleted
