Préparation examen 2 Flashcards
Environmental economics
Economics is how we organise scare resources in the most effective way, in a limited world. Environmental economics is economics applied to environmental issues
Price
Monetary value or quantity, a customer has to give up to get the product
Cost
What you have to give up for factory inputs in a production process
Perfect competition
Free entry and exit - Homogeneity - Many buyers and sellers - No transaction cost - Perfect information - Property rights - Rationality
Movement
On the same curve, higher price = higher quantity
Shift
For the same price level, the quantity will be higher or lower
Demand
The negative link between quantity demanded and price : when P increases, Q decreases
Income effect
Decrease of income = increase of D for inferior goods + decrease of D for normal goods
Substitution effect
Price increase of good A = consumption increase of good B
Things influencing the consumption of the same good
Price expectation - Price of related goods (substutes and complements) - Size and structure of the population - Taste
Equilibrium
When quantity supplied matches the quantity demanded (E : P when Qs = Qd = Q)
Surplus (excess supply)
A situation in which quantity supplied is greater than quantity demanded : price decrease
Shortage (excess demand)
A situation in which quantity demanded is greater than quantity supplied : price increase
Market failure
Inability of the market to allocate resources efficiently caused by :
- Market power from few players
- Imperfect info
- Existence of transaction costs
- Existence of external costs or benefits
Externality
Cost or benefit of a good or service that is uncompensated and that will impact on a third party due to external cost or benefit. It can be negative (Private costs > social costs = external costs > 0) or positive (Social benefits > private benefits = external benefits > 0)
Welfare economics
The study of how the allocation of resources affects economic well-being :
- Maximum price a buyer is willing to pay to get 1 unit of the good. The more he will buy the good, the less he is willing to pay for the extra unit.
- Minimum price a seller agrees to produce a product
Consumer surplus
The difference between the maximum price a consumer is ready to pay for a good or service and the actual price he pays
Producer surplus
The difference between the minimum price a firm is ready to produce a good or service and the actual price it takes
Market surplus
Consumer surplus + producer surplus : the sum up of all the individual surplus
Dead weight loss
Consumer surplus + producer surplus : the sum up of all the individual surplus
Sink function
The ability of the natural environment to absorb wastes and pollution (self-sustained system). We are overwhelming it
Market-based instruments to get the optimum price
Rely on economic forces to achieve environmental protection.
Act on price set up :
- Tax / subsidies
- Property rights
Act on quantity control = command-and-control of regulation :
- Regulations
- Standards
Act on both :
- Pollution tradable permits
Elasticity
How sensitive one variable would be to another variable
Determinants of Price Elasticity of Supply
- Inputs availability
- Ease of storing
- Productive capacity
- Size of the sector, firm or market
- Time adjustment
Perfectly inelastic PES (PED)
PES (PED) = 0
No response to change in price in quantity supplied
Inelastic PES (PED)
0 < PES (PED) < 1
% change in price > % change in quantity
Unitary elastic PES (PED)
PES (PED) = 1
% change in price = % change in quantity
Elastic PES (PED)
PES (PED) > 1
% change in price < % change in quantity
Perfectly elastic PES (PED)
PES (PED) = infinity
Price elasticity of supply (demand)
How the Q supplied (demanded) is impacted by a change in price. It takes into account the total revenue (expense)
TR (TE) = P x Qs (Qd)
Determinants of Price Elasticity of Demand
- Adjustment time
- Degree of necessity
- Share of income dedicated
- Scope of the market
- Substitutability
- Type of good (inferior or normal)
Market analysis
- How an event has impact the S, D or both
- The direction of the change
(- Evolution of the price) - How it will affect the equilibrium
Income elasticity of demand (IED)
How the Q demanded is impacted by a change in income
IED inferior goods
IED < 0
Subjective, when R increases, D decreases
IED necessity goods
0 < IED < 1
IED luxury goods
IED > 1
Giffen goods
When P increases, D increases for inferior goods
Veblen effect
When P increases, D increases for luxury goods
Prebish-Singer effect
In the long run, P of primary goods decreases in proportion to P of manufactured goods
Cross-price elasticity of demand
In the long run, P of primary goods decreases in proportion to P of manufactured goods
CPED subsitutes
CPED > 0
When Pb increases, Da increases
CPED complements
CPED < 0
When Pb increases, Da decreases
CPED no relationship
CPED < 0
When Pb increases, Da decreases
CPED perfectly competitive
CPED = infinity
Opportunity cost
Whatever must be given up to obtain something
Tax
Market-based instrument to control pollution :
- Indirect : on consumption
- Direct : on revenue/wealth
Tax avoidance
Use of legal rules to minimise the tax
Tax evasion
Use of illegal actions to minimise the tax
Tax incidence
The way the burden of a tax is shared between D and S. The inelastic one handles the most
Pigouvian Tax
Tax imposed on an activity that creates a negative externality.
It follows the ‘pollutive pays principle’ and works upstream : we tax at the beginning the total damage that can be at the end of the product value chain
Welfare loss
The excess of social costs over social benefits for a given output.
A situation where MSB is ≠ to MSC and society does not achieve maximum utility.
Why we face externalities in a competitive market?
Because the private costs or benefits don’t reflect the social costs or benefits of a transaction
Coase Theorem
Private economic agents set property rights, make them tradable and remove transaction costs. They can solve the externalities problem on their own and reach the optimum equilibrium
Coase Bargaining
When people solve an externality through private negotiation rather than government regulation (free-market environmentalism). For that to work, you ned a complete system of property rights, tradable.
Transaction costs
Administrative and legal elements we have to carry to make a transaction happen
Limits of Coasian theorem
- (Too) high transaction costs
- Bargaining unfeasibility due to speculation
- Large number of individual players : holdout effect, free rider problem, public goods
Holdout effect
If in a negotiation, you need to get an agreement from all players without distinction, one player can hold out all the negotiation
Free rider problem
Ability of someone to benefit from trade without paying the cost for that
Public goods
Non-rival (no competition to get the good) and non-excludable (you can’t prevent someone from using it)
Common goods
Non-excludable but rival (like fishing)
Private goods
Rival and excludable (we have private benefits and costs from them)
Pollution Haven Effect
Higher pollution effect because of weaker laws and less demand of environmental laws protection as people are poor
Environmental justice
Fair treatent for people regardless of race, colour, origin, income, etc. when it comes to environmental law
Rebound effect
The tendency in which by improving an input, you encourage the use of related outputs
Jevon’s Paradox
The technologicial improvement driven by P increase, leads to effciency gains of an input, cost decrease and rise of consumption
Cap-and-Trade System
An Emission Trade System (ETS) for managing pollution in which permits on a given amount of pollution emission are allocated, used and/or traded by firms (application of Coase Theorem)
Efficiency
Balancing external costs and external benefits
Pigouvian tax vs. Cap-and-Trade
Pigouvian tax sets a price to bring within economical agents’ costs the environmental external costs (= you can pollute as long as long as you pay)
Cap-and-Trade caps total pollution quantity with permits. Firms can choose to use, sell or purchase the permits. P is determined by S & D
Non-market based instruments
Regulations called “command-and-control” instruments : standards + technology-based regulations. They don’t internalise externality
Advantages of non-market based instruments
- Simple
- Possibility to specify the outcome targeted
- Lower distributional issues
Disadvantage of non market-based instruments
- Not flexible
- Less cost effective
