Homework #1 Due Today 1 st Group Quiz - Monday Sept. 10th
Writing Assignment Due Oct. 24th Slide 2 What is the difference
between a common good, a public good, and an open-access good? Give
examples. Slide 3 What is willingness-to-pay? What is your WTP for
a dozen eggs from Meijer? What is your WTP for a dozen farm fresh
eggs from organically raised free-range chickens? Explain why they
are different. Slide 4 Assume a change in the quality of a good
results in an increase in consumers WTP. Assume also that the
supply of the good is unchanged. Illustrate this situation
graphically and identify the change in net benefits attributable to
the change in quality. Slide 5 Price of Good Quantity of Good
Marginal Cost Marginal Benefit Equilibrium Price Equilibrium
Quantity Slide 6 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 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 Price of Good
Quantity of Good Supply Demand Equilibrium Price Equilibrium
Quantity Slide 10 Price of Good Quantity of Good Supply Demand
Equilibrium Price Equilibrium Quantity Slide 11 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 12 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 13 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 14
Price of Good Quantity of Good Supply Demand Equilibrium Price
Equilibrium Quantity Slide 15 Price of Good Quantity of Good
Marginal Private Cost Demand Market Price Market Quantity Marginal
Social Cost Q* P* Slide 16 Consider the following supply and demand
schedule for steel: Pri ce 20406080100120140160180
Qd200180160140120100806040 Qs2060100140180220260300340 Slide 17
Pollution from steel production is estimated to create an external
cost of sixty dollars per ton. Show the external cost, market
equilibrium, and social optimum on a graph. Slide 18 What kinds of
policies might help to achieve the social optimum? How would this
policy affect consumers? How would this policy affect producers?
What effect would the policy have on market equilibrium price and
quantity? Slide 19 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 20
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 21 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 22 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 23 If property rights are well- defined, and no significant
transaction costs exist, an efficient allocation of resources will
result even with externalities. Slide 24 Price of Good Quantity of
Good Marginal Private Cost Demand Market Price Market Quantity
Marginal Social Cost Q* P* Slide 25 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 26 Homework #1 Due Thursday Group Quiz Next
Thursday Writing Assignment Due Oct. 27th
