# Exam Review

Document Sample

Exam Review
Agenda
   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
sets
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
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%

Marginal
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

PV
MNB2
with r’

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

Recall:                   q1 < q1’
MUC= P - MEC              So p1 > p1’
So MUC1 > MUC1’
Intuition:
   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
sense:
   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
Hint:
   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

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

Stock
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

25

Marginal Benefits or Marginal Costs
120
Total Benefits or Total Costs

100                                                                                                     20
Marginal Benefits
80                                                                                                      15
Total Benefits
Net Benefits
60                                                                                                                                                  Marginal Costs
10
40
Total Costs
5
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
18
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

Slope=MB
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
versa)
   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
result
Policy Instruments
   Privatization
   if resource not very mobile, can contain with
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
outlays
   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
• 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
industry
• 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) =
Demand=MB

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

Total WTP is area under MWTP
- aggregate of WTP is total benefit
Three Way Economic
Taxonomy
   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
   REVEALED PREFERENCE METHODS
   use peoples observed behavior in markets to infer
their WTP for environmental goods
   Preferred by economists for USE value b/c reliable
   STATED PREFERENCE METHODS:
   design surveys
   Only choice for non-use value
   EXPERIMENTAL METHODS:
   constructed market, choice real, context artificial
   OFFICIAL REFERRENDA:
   constructed market, works provided using tax;
limited application
   Criteria choice: accuracy (Bias), precision
(variance)

DOCUMENT INFO
Shared By:
Categories:
Stats:
 views: 8 posted: 4/8/2010 language: English pages: 28