Final Flashcards
Define Economics
understanding the processes that govern production, distribution and consumption of goods and services (in an open market).
Define Neoclassical Economics (conventional)
environmental economics and natural resource economics
Define Environmental Economics
“economy in the environment”
-Focus on amenities and wastes
Define weak sustainability
Natural and human-based capital are perfect substitutes
Define Strong sustainability
Natural and human capital are complements (both required)
What is GDP
value of output produced by factors of production (producers) located in the domestic economy and equal to the sum of all of the factor incomes arising in the domestic economy
What is the equation for GDP
GDP = private consumption + gross investment + government spending + (exports - imports)
What does GDP not account for
- resource depletion
- environmental degradation
- equity or distribution
- social problems (crime)
- non-market services (clean air)
What are the key assumptions on the demand side of neo classical economics
- people are rational: have established preferences for different behavious and products
- Individuals act to maximize utility (and firms to maximize profit)
- Perfect information: consumers know all they need to know about all available options
- No consideration for external costs/ benefits
What are the key assumptions on the supply side of neo classical economics
- Perfect Competition among sellers (no barriers to entry)
2. No transaction costs
What type of relationship does price and quantity have?
An inverse one
fill in the blank: as price falls quantity demanded will __
Rise
What are the main reasons for the inverse relationship between price and quantity
- you may consume more of a good when its cheaper
- Decreasing marginal utility: (as you get more of the good, you value the next (marginal) unit less (or decreasing marginal willingness to pay – MWTP)
What are the changes that shift a demand curve
- Number of buyers
- Preferences/ tastes
- Incomes
- Price of other goods (complement/ substitute)
- Consumer expectations (price and income)
True or false: a shift in demand curves are similar to change in quantity demanded
False: they are distinct from each other
Are supply curves and MC curve the same?
Yeah, they both show the quantity of supply of a product by a firm at each possible price
What does MC curve mean
Marginal cost curve
What is the law of supply
All else equal, if the price of a good increases, the supplier will supply more of the good
Why do marginal costs increase?
- lowest cost production occurs first
2. more expensive production occurs later
What are the causes of shifts in supply curves?
- technology
- number of sellers
- input (resource) prices
- taxes and subsidies
- expectations of costs
True or false: shifts in supply curves are distinct from movements up and down a supply curve (or quantity supplied)
true
Market equilibrium: the area above the price eq
the consumer surplus
Market equilibrium: what is the area below the price equilibrium
The producer surplus
When do free markets produce an efficient allocation of resources
- good information on consumption benefits and costs (perfect information)
- Large number of buyers and sellers (perfect competition)
- Each transaction affects only the buyer and seller (no externalities)
What is it called when free markets dont meet all these conditions
MArket failure
What are the different types of market failure?
- externality
- common property resource
- public good
(there are more then this)
What is an externality?
- transaction about third party
- third parties preference (e.g. WTP) not expressed in the transaction (or market)
- free market outcome is inefficient (loss of welfare)
True or false: externalities can only be negative
False, they can be positive too
What is an example of a negative externality
producing or consuming activity imposes a cost on a third party
-i.e. pollution that arises during production, congestion from driving, fishing by a company depletes fishery stocks
What is an example of a positive externality
Producing or consuming activity creates a benefit to a third party
i.e. Research and development and spillover of ideas, immunization and public disease resistance, good home maintenance and high neighbouring property values
What are ways to internalize an externality
- put a price on it
2. Assign property rights
Explain how you could put a price on an externality to internalize it
- using a pigouvian tax (a tax reflects the externality)
- make the costs private = social costs
Explain how you could assign property rights to internalize an externality
- coase theorem (assign and enforce property rights)
- in theory, it doesnt matter which party has those rights (could be “right to pollute” or “right not to pollute”)
What are the two factors that define the classes of goods
Excludable and rival
What does excludable mean
it is possible to exclude other individuals from consuming the good
What does rival mean
use of the good by one person detracts from use of the good by another person
What class of good is it if its excludable and rival
it is a private good (toast)
What class of good is it if its not excludable or rival
it is a public good (light house)
What class of good is it if its excludable but not rival
club goods (cable tv, fishing on a well stocked pond)
What class of good is it if its rival but not excludable
common property (grazing lands)
What does the provision of a public good produce
a negative externality
What does the provision of a public good produce?
a positive externality
What are they types of trade off analysis
- cost-benefit analysis
- Cost-effectiveness analysis
- Uncertainty analysis
- multi-attribute tradeoff analysis
- energy-econmy modelling
Explain a CBA (cost-benefit analysis or discounted cash flow analysis)
-Systematically comparing costs and benefits over time by putting then into a single unit (e.g. 2012 dollars)
What is the goal of a CBA
Economic efficiency
- total benifity should exceed total costs
- distribution of costs/benefits is NOT the focus (benefits > costs possible but some people may still be fucked around)
True or false: the goal of a CBA is the distribution of costs/benefits
False, Project could have benefits > costs, but still make some people worse off
What are the steps of a cost benefit analysis
- specify the project (options, scale and perspective)
- Determine inputs and outputs of the project
- value non-market costs and benefits in monetary terms
- compare the costs and benefits (discount future costs and benefits to present values, apply decision rule, conduct sensitivity analysis, make recommendations)
What are the limitations to a CBA
- Uncertainty (financial costs are uncertain, non-market values are difficult to monetize, ecosystem complexity, future costs/benefits)
- assumes “weak sustainability”
- ignores distribution of costs and benefits (equity)
- Ignores marginal utility of money (different valuation across different income groups)
What does TEV stand for?
Total economic value
What does a TEV consider
- direct use values
- indirect use values
- non use values (value of no present consumption)
What does it mean for a TEV to consider direct costs
- extractive (e.g. harvesting)
- non extractives (recreation)
What does it mean for a TEV to consider indirect use values
ecosystem services like soil retention, climate stabilization, water management and life support
What does it mean for a TEV to consider non-use values
-existence value (ethical feeling for existence, e.g. polar bear)
What are the ecosystem services categories
- provisioning services
- regulating services
- cultural services
- Supporting services
What are examples of supporting services
- nutrient cycling
- soil formation
- primary production
What are examples of provisioning services
- food (crops/livestock/wild food)
- fiber (timber/cotton/hemp/silk/wood fuel)
- Genetic resources
- biochemicals/natural medicines/ pharmaceuticals
- fresh water
What are examples of regulating services
- air quality regulation
- climate regulation
- water regulation
What are examples of cultural services
- aesthetic values
- spiritual and religious values
- recreation and ecotourism
In the TEV categories (1. direct, indirect and non-use) where does provisioning services fall
direct use
In the TEV categories (1. direct, indirect and non-use) where does regulation services fall
indirect use
In the TEV categories (1. direct, indirect and non-use) where does cultural services fall
non-use
What are the two primary categories of techniques for valuations
- Revealed preference
- stated preference
Explain revealed preference
observed in market (real)
Explain stated preference
Elicited from consumer (hypothetical)
What are the sub types of valuation methods that fall under reveaved preference
- market prices (market based)
- avoided costs (market based)
- Hedonic pricing (surrogate markets)
- travel cost (surrogate markets)
What are the sub types of valuation methods that fall under stated preference
Contingent valuation (non-market based)
What is the martinal damage cost (MDC)
Relationship between quantity of pollutant and marginal damage it causes
Fill in the blank: typically marginal damage increases with _____ emissions
increased
What are the factrs that influence damage cost
- pollutant
- region
- climate
- timing
- cultural values
- income levels
A curve showing damage on the y-axis and emissions on the x-axis: where do you find the total damage cost
area under the curve.
What does the height of the marginal damage curve show
how much total damages change if there is a small change in the quantity of emissions.
What are abatement costs
cost of reducing environmental negatives such as pollution
What does a marinal abatement cost curve show
the marginal cost of additional reductions in pollution
What does MAC stand for?
Marginal abatement cost
What are some ways to reduce emissions or damages
- reduce production
- changing inputs
- altering production technology
- treating emissions
- changing source location
Fill in the blanks: Abatement costs function starts at ______ then slopes ___ to the ___
uncontrolled, up, left
Where are the total abatement costs on an abatement cost curve
area under the curve
What are the best abatement costs to start with
the cheap one, then move to the more expensive
When is there optimat pollution
Where the MDC and MAC meet (where the marginal damage curve and the marinal cost curve meet)
What are the limitations to “optimal” pollution
- uncertainty
- assumes weak sustainability
- ignores distribution of costs and benefits (equity)
What is the uncertainty in the optimal pollution model
- MDC & MAC can be very difficult to estimate (intangible, non-market values)
- Assumes MDC and MAC
What are three alternative perspectives to optimal pollution model
- show MAC and MDC with uncertainty
- Just set an absolute standard (safe minimum standard -SMS)
- Determine limits of what is affordable and what is SMS
What are some arguments in favour of the alternatives to the optimal pollution model
- Due to large uncertainties in cost (especially damages) economists should play limited role in setting environmental targets
- instead, scientists should help set targets, economists focus on policy
Explain the term goal in the context of policy evaluation
- What you aim to achieve
e. g. 80% reduction in GHG emissions
Explain the term policy in the context of policy evaluation
- government laws or action implemented to achieve social goals (public policy)
e. g. carbon tax
Explain the term actions in the context of policy evaluation
what is done in order to meet the env gal and/or comply with policy
e.g. buying an electric vehicle
What are the criteria for evaluating policy
- effectiveness
- efficiency
- fairness (or equity)
- simplicity
- acceptability
What does effectiveness mean in terms of policy evaluation
achieves env goal (avoids side effects)
what does efficiency mean in terms of policy evaluation
equi-marginal principle, cost effectiveness
what does fairness (or equity) mean in terms of policy evaluation
equitable distribution of costs and benefits or meeting minimum level of basic rights
what does simplicity mean in terms of policy evaluation
administrative feasibility
what does acceptability mean in terms of policy evaluation
political support
What are the two equimarginal principals
1. marginal cost of the last unit abated is equal to the marginal damage cost (optimal pollution)
Why is managing fisheries so difficult
- Market failure (common pool resource)
- Ecological complexity
- Public and political acceptability of policy
Explain market failure regarding the management of fisheries
- open ocean (no property rights beyond 200 miles of land)
- Lack of property rights in come lakes and rivers
Explain ecological complexity regarding the management of fisheries
- population thresholds and collapse (and uncertainty)
- biodiversity
- genetically distinct sub groups
- migratory species (e.g. tuna/sword fish)
- difficult to “see” the fish
Explain public and political acceptability of policy
traditions of lifestyle and community reliance for income
-clout of fisheries interest groups
What does a growth curve look like?
Bell curve with a dip below the x-axis right before the y-axis
what is MSY
maximum sustainable yield - largest average catch that can be captured from a stock under existing env conditions
What is the y and x axis on a growth curve
y = annual growth rate x = stock (total population)
what does the the dip below the x-axis on a growth curve represent?
extinction
What is a typical MSY
20-50% of max stock
What are some examples of real world ecological complexities reduce the accuracy of a growth curve
- multiple fish species that affect each other (trophic levels)
- other ecosystem interactions
- migratory species
How do you regulate fisheries
- open access regulations (manage effort)
2. limit entry regulations
what is the objective of regulating fisheries
sustainable efficient fishing
regarding the regulation of fisheries, what does open access regulations mean?
- technology restrictions (boat size, gear limits)
- size and weight limits for fish
- when fish are caught (season limits)
regarding the regulation of fisheries, what does limited entry regulations mean?
- individual tradable quotas (ITQs)
- Exclusive spacial harvest rights
What does ITQ stand for
Individual tradable quotas
What are the pros of ITQ policy
(Individual tradable quotas)
- can be effective (1/2 likelihood of fishery collapse)
- efficient (established property rights, incentivizes careful/efficient fishing
What are some cons of ITQ policy
(individual tradable quotas)
- equity (how to allocate permits/quotas)
- can lead to “high-grading”
- does hurt local fisheries (e.g. if investors buy up all the quotas)
- uncertainty around determining total allowable catch
What are the factors that influence the changes in estimates for non renewables
- used over time
- new discoveries
- changing price/technology
What are the two main perspectives on fossil fuel supply and demand
- peak oil (hubberts curve)
2. neoclassical perspective
explain the peak oil perspective for fossil fuel supply and demand
- geologists perspective
- technology is static
- once we pass peak oil consumption then economic and social catastrophe
Explain the neoclassical perspective on fossil fuel supply and demand
- argues that hubbert’s curve doesnt account for
- technology change and dynamics
- international dynamics
- market feedbacks and price signals
Are we running out of fossil fuels?
yes we will eventually but CC will effect us before that..
What is backstop fuel
many subs for oil as prices rise (this includes changing the definition of oil)
Explain optimal allocation over time
-saving some of the resource for future consumption increases profits to the firm and increases overall social efficiency
in the context of optimal allocation over time, what is social efficiency?
optimal distribution of resources in society, taking into account all external/internal cost/benefits
What is an opportunity cost
consuming a unit of a non renewable resource today carries this cost, the value of keeping the resource and selling it in the future
What does the present consumption of a non renewable imply
a user cost on future generations
What is a user cost?
a cost associated with the loss of future potential uses of a resource, resulting from consumption of the resource in the present
what is one way of internalizing the externality of a user cost
a resource depletion tax
What is Hotelling’s Rule
to maximize benefit of an exhaustible resource endowment, it should be extracted such that its “net price” rises over time at the rate equal to the rate of interest
According to Hotelling’s rule predict the future net price will increase if its an exhaustible resource
exponentially
In Hotelling’s rule the net price = ___ - ____
=price - marginal extraction cost
What are other words for net price
- marginal net revenue
- profit
What was the suggestion made by Hotelling
deposits of exhaustible resources (e.g. oil) should be viewed as an asset like any other income producing investment
According to Hotelling, what is optimal resource depletion dictated by
interest rate
according to hotelling, what does a high interest rat incentivise
using the resource quickly (have the effect of weighting present benefits much more heavily then future benefits)
according to hotelling, what does a low interest rat incentivise
conservation
-have the effect of weighting future benefits much more heavily then present benefits
What is dynamic efficiency
“net price” rises over time at the rate of interest
what factors result in hotelling ‘s rule not being observed in empirical cases
- changing estimates in reserves
- changing definitions of oil
- tech change
- cheaper alternatives
What is scarcity rent
What is Hartwick’s rule
invest resource rents
-nations should invest all rent earned from exhaustible resources into other capital
What it the purpose of Hartwick’s rule?
to keep the standard of living for intergenerational equity
