Homework #1 Due Thursday Group Quiz Next Thursday Writing
Assignment Due Oct. 27th Slide 2 Price of Good Quantity of Good
Marginal Cost Marginal Benefit Equilibrium Price Equilibrium
Quantity Slide 3 Static Model Time does not matter Cost/Benefit
Analysis cutting down trees Benefit > Cost => support action
Cost > Benefit => oppose action Dynamic Model Account for
time Cost/Benefit Analysis accounting for time Max [B0, B1, B2]
Present Value $1 invested today at 10% interested yields $1.10 a
year from now. Present Value (PV) of X one year from now is X/(1+r)
2 r is the interest rate (discount rate) PV[Bn]=Bn/(1+r) n Slide 4
Exclusivity All benefits and costs accrued as a result of owning
and using the resources should accrue to the owner, and only the
owner, either directly or indirectly by sale to others
Transferability All property rights should be transferable from one
owner to another in a voluntary exchange Enforceability Property
rights should be secure from involuntary seizure or encroachment by
others (ie. eminent domain) Slide 5 Price of Good Quantity of Good
Supply Demand Equilibrium Price Equilibrium Quantity Slide 6 Price
of Good Quantity of Good Supply Demand Equilibrium Price
Equilibrium Quantity Slide 7 Price of Good Quantity of Good Supply
Demand Equilibrium Price Equilibrium Quantity Slide 8 Price of Good
Quantity of Good Supply Demand Equilibrium Price Equilibrium
Quantity Slide 9 Efficient Property Rights => Net Benefits are
Maximized Consumer Surplus area under the demand curve minus the
area representing cost Producer Surplus area under the price line
that lies over the marginal cost curve Net Benefits = CS + PS Slide
10 Exclusivity when the owner bears all of the consequences of his
actions Externality when the welfare of some agent (individual,
household, or firm) depends on the activities under control of some
other agent. Negative externalities (external diseconomy) Positive
externalities (external economy) Slide 11 Price of Good Quantity of
Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 12
Price of Good Quantity of Good Marginal Private Cost Demand Market
Price Market Quantity Marginal Social Cost Q* P* Slide 13 Example,
when Duncan Hines produces brownie mix, it pollutes a small amount
of cocoa powder into the air. This makes the air smell like
brownies, and increase the MSB from the production of brownies.
Slide 14 If property rights are well- defined, and no significant
transaction costs exist, an efficient allocation of resources will
result even with externalities. Slide 15 The Pursuit of Efficiency
Legislative and Executive Regulation Direct Control Quota Cap and
Trade Pigovian Tax polluter pays principle Not always clear who
pays Slide 16 Pigovian Tax Problem Suppose the demand function for
gasoline is P d = 6.5 - 0.5 Q where Q represents billions of
gallons of gasoline. Suppose the supply function for gasoline is
based on the firms marginal private costs and equals P s =Q What is
the market equilibrium level of output and price? Slide 17 Pigovian
Tax Problem Suppose the governments EPA determines the socially
optimal amount of gasoline use is actually 3 billion gallons of
gasoline. To reach this socially optimal quantity, the government
is going to implement a per unit tax on the consumption of
gasoline. The tax revenue from which will go to protecting the
environment as determined by the EPA. What should the tax amount
be? What price will the consumers pay? What price will the sellers
receive? How much money will go to protecting the environment?
Slide 18 Price of Good Quantity of Good Marginal Private Cost
Demand Market Price Market Quantity Marginal Social Cost Q* P*
Slide 19 Private Goods rivalrous, excludable Public Goods
non-rivalrous, non- excludable Slide 20 Genetic Diversity critical
to species survival Useful for cross-breeding to develop superior
strains Number of Species Species interdependence Provides new
sources of food, energy industrial chemicals, raw materials, and
medicines Slide 21 Graphically non-rivalry means that if each of
several individuals has a demand curve for a public good, then the
individual demand curves are summed vertically to get the aggregate
demand curve for the public good. Slide 22 The Illinois Power
Authority is considering updating its transmission substations to
use smart-grid technology, which improves reliability and
efficiency in the electric grid. Each time a new smart-grid meter
is installed Chicago, Naperville, and Rockford customers all
benefit from increased reliability of their electricity. A study
was done to determine the benefit to each city as follows: Chicago
Marginal Benefit=10-0.5Q Naperville Marginal Benefit=5-0.5Q
Rockford Marginal Benefit=10-1Q What is the total marginal benefit
when five smart-grid meters are installed? Slide 23 There are two
people in the world They both benefit from preserving the
rainforest, with an inverse demand function P=50-2Q Preservation is
a public good The marginal cost of preserving the rain forest is
$20 per acre. Estimate total demand, and the optimal number of
acres to preserve. Slide 24 Coase Theorem Problem A chemical
factory is situated next to a farm. Airborne emissions from the
chemical factory damage crops on the farm. The marginal benefits of
emissions to the factory and the marginal costs of damage to the
farmer are as follows MB= 360 0.4 Q and MC=90+0.2Q From an economic
viewpoint, what is the best solution to this environmental conflict
of interest? How might this solution be achieved? Slide 25 Homework
#1 Due Thursday Group Quiz Next Thursday Writing Assignment Due
Oct. 27th
