Exam Review

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					Exam Review
   Test Taking Tips
   Review of Non-renewable resources
   Review of Renewable resources
   General Review
         General Test /Studying Tips
   Make sure you can recreate the graphs/models
      Know all the labels

      Know what you are graphing

         Demand?

         Inverse Demand?

         Net Marginal Benefits?

         Present Value?

   Understand the Intuition
      What does everything represent?- don’t just write
       what the graph shows
   Know and use the vocabulary
   Read the question and make sure you answer all parts
Study Tips
   Take the practice Mid-term without
    reference to your notes
   Look over class notes and past problem
Non-Renewable Resources
   Step 1: Write down marginal extraction
    costs in each period. MEC1 and MEC2
   Step 2: Write down marginal benefits in
    each period.
       Demand Function: q(p)
       MB= Inverse Demand Function
       MB1=inverse of D1
       MB1=p(q1)= a-bq1
   Step 3: Calculate marginal net benefits in
    each period
       MNB= MB - MEC= a-bq1 - MEC1
   Step 4: Write down the present
    discounted value of marginal net
    benefits in each period.
       Discounting: PV= FV/(1+r)t
       Recall: we use discounting so we can
        compare value of goods across time
        periods. Otherwise we are comparing
        apples and oranges.
       PDV[MNB2]= (a-bq2-MEC2)/(1+r)
       MNB1
Step 5: Draw the PDV of marginal net benefits in each
period on the same graph                        Marginal
Marginal                                                                       Net Benefit
Net Benefit                                                                    in Period #2
in Period #1

    6          PV of Marg. Net Benefits In Period #1
                                                    PV of Marg. Net Benefits    5.45
                                                    In Period #2

        q1 0              5                 10 q1               15             20
                                                                               0 q2
          20                                10 q2
     So what happens if r>10%

To figure out what changes when r >10%, think to
yourself: Where is the interest rate represented in
this graph? Which step of graphing process took the
interest rate into account?
-If question asks about change in MEC, then think
were is MEC taken into account? Etc…
Step 4: Write down the present
discounted value of marginal net
benefits in each

   PDV[MNB2]= (a-bq2-MEC2)/(1+r)
    So now we have r’>r
   What is the relationship between:
   MNB2 and MNB2’
       MNB2 = (a-bq2-MEC2)/(1+r)
       MNB2’ = (a-bq2-MEC2)/(1+r’)
       We know (1+r)<(1+r’)
       Therefore MNB2> MNB2’
                                    r = 10%

Marginal                                                                       Net Benefit
Net Benefit                                                                    in Period #2
in Period #1

    6          PV of Marg. Net Benefits In Period #1
                                                    PV of Marg. Net Benefits    5.45
                                                    In Period #2

        q1 0              5                 10 q1               15             20
                                                                               0 q2
          20                                10 q2
                                    r’ > 10%

Net Benefit
in Period #1

    6          PV of Marg. Net Benefits In Period #1
                                                    PV of Marg. Net Benefits    5.45
                                                    In Period #2 with r

                                                                     with r’

        q1 0              5                 10 q1      q1’      15             20
                                                       q2’                     0 q2
          20                                10 q2
        What happens to price and MUC?
                 Period 1
                      MUC1 MUC1’       p1
               q1 q1’

  Recall:                   q1 < q1’
  MUC= P - MEC              So p1 > p1’
                            So MUC1 > MUC1’
   r: discount rate
        the greater the interest rate the higher the rate of
        discount for benefits in period 2: we value benefits
        in period 1 relatively more than benefits in period 2
        as r increases
   MUC: Marginal User Cost
       Scarcity rent: measure of scarcity in the economic
       the opportunity cost of extracting a unit of the resource
        in one period instead of leaving it in the ground until
        the next period
       In situ resource value/ shadow price: this is the
        economic value of the resource in the ground
   Don’t forget that changes in period two are
    discounted! Therefore if MEC for example
    changes by $1 in both periods, that’s a
    change of $1 in period 1 but a change of
    $1/(1+r) in period 2.
   So if r = 10%, the change in period 2 is only
    $1(1.1) = approximately 91 cents in present
    value terms
   Think: how do we show this change on the
    graph? (Hint: In calculating MNB)
Renewable Resources
     A: Minimal Viable Population (Unstable)
B: Natural Equilibrium/Carrying capacity (stable)
                       Critical Depensation
   Growth Rate Stock

                        A            B
The Biological Dimension
Growth Rate Stock
                           H2: Extinction: yield
                           rate > growth rate
                           MSY: max
                           growth rate =
                           yield rate
                           H1:two equilibria
                           (one stable)

                                Recall : Static Efficiency
                                             To achieve static efficiency (single time
                                              period), undertake policy to the point at
                                              which marginal benefits equal marginal costs
                                              Total Benefits and Total Costs                                                                     Marginal Benefits and Marginal Costs


                                                                                                  Marginal Benefits or Marginal Costs
Total Benefits or Total Costs

                                100                                                                                                     20
                                                                                                                                                       Marginal Benefits
                                80                                                                                                      15
                                               Total Benefits
                                                                    Net Benefits
                                60                                                                                                                                                  Marginal Costs
                                                                           Total Costs
                                20                                      Q*                                                                                                     Q*

                                  0                                                                                                      0
                                      0   1    2      3    4    5      6       7     8   9   10                                              0     1   2      3     4      5   6      7     8        9   10
                                                   Quantity of Pollution Control                                                                           Quantity of Pollution Control
  Ec = as long as Total Benefits are greater than total costs-- competitors will
  enter the market: why?
  EMSY = maximum sustainable yield
  Ee = Efficient effort: maximizes Net Benefits: MB=MC

Benefits and Costs
 of Fishing Effort

                                                         Total Cost

                      Ee    EMSY        Ec
                                                          Fishing Effort
Reason why get EC:OPEN ACCESS
   Contemporaneous externality: one fisher
    affects another ( if I catch you cant, and vice
   Intertemporal Externality: take today, less
    tomorrow for all
   = not take into account future value MUC
    (This is why hotelling rule for non-renewables
    required secure property rights)
   Market on its own cannot achieve efficient
Policy Instruments
   Privatization
       if resource not very mobile, can contain with
        barriers, or species instinctively return to
        identifiable location
       Is efficient
   2. Regulatory
       ex. Limit season, use technology, limit available
        harvesting area
       Not efficient because scarcity rent is still gone,
        eaten up with costs
   3. Tax
       efficient
       But distributional problems (transfers don’t matter
        for efficiency but do matter for the fishermen)
General Review
      The Fundamentals
   Pareto Criterion: A policy change is an improvement if at least
    some people are made better off and no one is made worse off
    Kaldor-Hicks Criterion: world is made better off overall (welfare
    improvement) if size of gains and size of losses are such that
    gainers could fully compensate losers and still be better off
    (“potential Pareto Improvement”)
   Kaldor-Hicks is more useful
   There are virtually always losers, someone is inevitably made
    worse off
   Remember: Kaldor-Hicks Criterion is a necessary condition for
    satisfying the strict Pareto Criterion
Economic Costs
   The economic cost of an activity is the value
    of whatever must be given up for the activity
    (opportunity cost)
   Opportunity cost typically exceeds monetary
   Transfers between members of society, such
    as taxes paid by firms or individuals to
    governments, should not be counted as costs
   Any social deadweight loss from taxation and
    any labor costs to collect and process taxes,
    however, should be counted
Cost Component
Direct Compliance Cost Method
• Sum up compliance costs obtained from engineering estimates,
and multiply by quantity, then possibly add government
administrative costs
• Assumes no behavioral response
• Least expensive method of cost analysis
• May be appropriate when elasticities (behavioral responses) are
small or compliance costs (and price increases) are small
Partial Equilibrium Analysis
• Look at effects on supply and demand in affected market
• Incorporates behavioral responses
• But assumes that effects of regulation are confined to one market
or a few
General Equilibrium Analysis [probably necessary for power
sector regs]
• Look at effects on all sectors of economy
• Complex and expensive, but may be necessary if regulating a key
• Two principal approaches: input / output (I/O) models and
computable general equilibrium (CGE) models
Economic Benefits
Measures for Environmental “Goods”
  Marginal Willingness to Pay (MWTP) =

 Measures for Environmental “Bads”
  Marginal Willingness to Accept (MWTA)

     Total WTP is area under MWTP
    - aggregate of WTP is total benefit
Three Way Economic
   Use Value
       Benefits from using a good or service
   Option Value:
       Benefits people receive from having the option to
        use the good or service in the future
   Existence Value
       Benefits people receive from knowledge of the
        existence of goods or services
Methods Measure Benefits
       use peoples observed behavior in markets to infer
        their WTP for environmental goods
       Preferred by economists for USE value b/c reliable
       design surveys
       Only choice for non-use value
       constructed market, choice real, context artificial
       constructed market, works provided using tax;
        limited application
   Criteria choice: accuracy (Bias), precision