Exam 1 Concepts

Question 1

Non-market Valuation

Answer 1

Method 1 Reveled Prefernces
- Estimate WTP from market transactions
- Travel cost method
Hendonic Models (an environmental good/amenity is an attribute of a market good)
- Replacement Cost Method
Stated Preference
- Elicit WTP in surveys (contingent valuation)
- Can be used for eliciting non use value
- challenges, misunderstanding the survey, incentive to not tell the truth

Question 2

Estimating Costs

Answer 2

• Private sector costs to firms (scrubbers)
• Government sector costs (administrative)
• Social welfare costs (electricity prices)
• Transitional costs (employment)

Question 3

Cost Benefit Analysis

Answer 3

Goal is to calculate costs and benefits in an effort to make policy choices
- If net benefits are positive, that suggests policy improved aggregate net benefits

Question 4

Criticisms of Cost Benefit Analysis/Net Benefits Approach:

Answer 4

1. Political and moral consideration
   - Is net benefits really the goal that you care about
2. Placing a dollar value on goods like clean air/clean water devalues them
   - Is it reasonable to put a dollar on certain things that are considered fundamental human rights
3. Discounting Privileges Current Generations:
   - Money now (too) can be invested to make interest
   - You prefer money today over tomorrow
4. Cost Benefit Analysis does not focus on Distribution Equity
   - difference between equity and equality
   - who is receiving the money later

Question 5

Discounting Explained

Answer 5

Money now (too) can be invested to make interest
Future Value = (Present Value) * (1+r)t
r = interest rate
t = number of time periods
You prefer money today over tomorrow
Rearrange Formula: Future Value = PV(1+r)t
PV=FV(11+r)t=FV1(1+r)t

Question 6

Conditions for Markets to be Efficient:

Answer 6

1. The market is competitive, meaning that firms and consumers take prices as given
2. Firms and consumers both have good information about the quality of the goods or services being traded
3. The market is complete in the sense that all relevant costs and benefits are borne by the market participants (the firms and consumers involved in the transaction)

Question 7

Tragedy of the Commons Important Conditions

Answer 7

Two important conditions: open access resources and diminishing marginal return
- Open access resources are nonexcludable but not nonviral so rivalrous
- Diminishing marginal returns is the idea that as the number of people using resources grows the benefits from the resource increase at a slower rate