Midterm Flashcards
How is the optimal level of pollution defined?
If the marginal cost of pollution abatement is just equal to the marginal benefit from pollution abatement, then we have reached the point where society’s welfare has been maximized with respect to environmental quality.
Can the environment be too clean?
If the marginal cost of pollution abatement exceeds the marginal benefit from the reduction, then the benefit of cleaning the environment is not worth the expense.
What is consumer surplus?
Consumer Surplus is the difference between Willingness to Pay and what one actually paid
If two firms have different marginal abatement costs for emissions what is the efficient level of pollution abatement…
The efficient level of pollution abatement is where firm’s MAC is the same.
What are some of the assumptions of the Tiebout model of local public goods
- Full Mobility
- Full knowledge of differences in revenues and spending on local public goods
- large number of communities to choose from
- there are no employment constraints
- there is an optimal community size
- Communities below optimum size try to attract new residents to lower average costs
If moving from allocation A to allocation B is a pareto improvement, that means that:
Someone was made better off by moving to allocation B, and no one was made worse off.
Determining who has standing in benefit cost analysis means…
deciding whose costs and benefits will be included in the analysis.
Optimal Quantity Produced
MSC = MPC + MEC
To find optimal pigouvian tax or subsidy…
set the subsidy equal to the difference between MPB and MPC at Q*
What are the limitations of the CPI?
- Doesn’t account for CPI
- Doesn’t fully account for new, superior products
- Doesn’t fully account for changes in quality
- May not capture shopping patterns that determine what people actually spend.
Two Welfare Theorems
First Theorem of Welfare Economics = The competitive Equilibrium is Efficient
Second Theorem of Welfare Economics = Any efficient allocation can be achieved by the competitive market, given an appropriate initial endowment of goods.
Sensitivity Analysis
Essentially, do this in a BCA in order to determine how a change in a presumption will affect the outcome.
What would be the appropriate pigouvian tax?
Tax will be the difference between the MPB and MPC at Q*, so I’ll need to find those prices from the demand and supply equations.
Revealed Preference Methods
- Travel Cost Methods
- Hedonic Pricing
- Valuing Life: labor market/consumer price studies
Travel Cost Method Issue
How to measure opportunity cost of time?
- Ex: people may derive utility from the scenic drive to a national park.
Travel Costs Advantages
- Looks at actual Choices People Make
- Relatively easy/inexpensive
- relatively easy to analyze and collect data and explain results
Travel Costs - Potential Issues
- If trips have multiple purposes, hard to isolate value of the recreational site
- How to value opportunity cost of time.
- Need variation for regression results to work
- Endogeneity - what if people choose to locate near a site because they value it?
- Does not capture passive value
Hedonic Pricing Advantages
- Looks at actual choices people make
- Reliable data are often readily available
Hedonic Pricing Potential Issues
- Concern about omitted variables
- Assumes buyers have full information on all attributes
- Assumes people have free choice over attributes in the housing market
- can’t be used for passive valuation
State preference - Contingent valuation is especially useful for what?
It was actually designed to capture passive value in addition to anything that does not have a market value
A “statistical life”
what is it worth to you to reduce chance of death?
What is it worth to society to reduce chance of death?
High Rivalry, Low Excludability: Open Access Resources Examples
Fisheries, Grazing Lands, Parks
For rival goods, derive market demand curve by summing…
horizontally
For nonrival demand goods, derive market demand by summing…
vertically
Implications of Tiebout Model
- Decentralization
- As number of jurisdictions increases, inefficiency decreases
- As number of jurisdictions increases, the more homogeneous they will become
- Capitalization: the value of local services and the cost “cost” of taxes are capitalized into the housing prices.
To find a pigouvian tax rate…
Put the optimal quantity into the MEC function
How is the optimal quantity found
Set the MSC (Supply) equal to the MB (Demand)
