Topics Today (5/8/13)  Finish up last lecture (start at slide 42)  Summary/Review  Office hours for next week TBA  Discussion section this week is a review.  Final is comprehensive 1Top 10 concepts of the class: #1  #1: Economics is a positive discipline  Examples of positive aspect:  What is the effect of a TAC without boat-specific quotas?  Which tends to be cheaper (from a social perspective) as a means of obtaining a reduction in emissions: tradable pollution permits or command-and-control?  What was the effect on emissions of the Mexico City “Day Without a Car Policy? What about the Cash for Clunkers program?  How does the Endangered Species Act affect the behavior of private landowners?  Is the efficient sustained yield stock level higher or lower than the maximum sustained yield stock level? What did Grafton find?  What is the effect of the discount rate on resource extraction over time?  What’s been the history of resource prices, and why has this occurred?  Under what conditions might improvements in energy efficiency cause *more* energy to be used than before the improvements occur? 2Top 10 concepts of the class: #2  #2: People respond to benefits/costs at the margin  It provides insights about effective environmental policy  Ex: If the price of electricity rises, do households use less?  Ex: Does an increase in the property tax for trash collection have an effect on trash disposal?  It is critical to understanding the issue of obtaining an objective at least cost  E.g. gas tax vs. CAFE standards, real time pricing of electricity vs. energy efficiency mandates, mandating carbon efficiency from electric generators vs. carbon tax 3Top 10 concepts of the class: #3  #3: Normative criterion of economics is typically based on maximizing social net benefits (economic efficiency as defined by the Kaldor-Hicks Pareto Improvement Criterion)  Does not imply everyone is made better off, but rather that everyone could be made better off  Examples:  Cap-and-trade programs (Overall, is society better off under the SO2 program? Who wins and who loses?)  Fisheries regulation.  Carbon tax  The emphasis on cost effectiveness (obtaining a result at lowest cost) is necessary for this criterion. 4 #4: Benefit-Cost Analysis is the application of economic principles to decisions involving discrete alternatives; it reflects the attempt to maximize social net benefits when there are only several choices.  Can you explain at least two issues/possible pitfalls with BCA?  Why aren’t jobs counted as benefits in a BCA?  How should a BCA analysis deal with nonmarket environmental values, such as the value of an area for raptor habitat? Top 10 concepts of the class: #4 5Top 10 concepts of the class: #5  #5: Markets allocate goods and services efficiently (to maximize social net benefits) when all costs and all benefits are private.  What does it mean to say that a cost or benefit is “private”?  Would the market produce the efficient amount of ethanol in the absence of the ethanol subsidy?  Adam Smith’s “Invisible Hand”: Explain with a graph that when all benefits and costs are private, the market allocation of a good maximizes social net benefits (that is, what is the process by which the market generates the “right” amount of a good?)  Implicit in this: the efficient amount of a good is produced at least cost  During the course, we did not talk about this case (market allocation of priveate goods) too much; exception was in discussion of the Coase Theorem, nonrenewable resources, revenue neutral carbon tax 6Top 10 concepts of the class: #6  #6: Markets are forward-looking; their weaknesses in anticipating the future are not easily addressed by intervention or regulation  Can you explain…  Why the “Invisible Hand” generates Hotelling’s Rule?  Why a farmer will treat his land well (that is, he will not ruin the land by “mining” the soil) even when he plans to sell it in only a few years 7 #7: The discount (interest) rate reflects time preferences and the opportunity cost of capital  Discount rate is a double-edged sword with respect to the environment  Economists see no reason to not discount environmental benefits/costs of a project in the same manner as other benefits/costs; BUT…  For projects/programs extending past several generations into the future…  ethical issues are challenging,  the conceptual framework must change (notions of sustainability and rights to current resources). Top 10 concepts of the class: #7 8 #8: When determining the cost of economic activity of any sort, the relevant measure is opportunity cost –the value of inputs in their next best alternative  Explain the concept of marginal user cost in the context of groundwater extraction. Top 10 concepts of the class: #8 9 #9: Because environmental goods and bads often are not private, there is no obvious economic signal of their value  A considerable portion of environmental economics is concerned with determining the value of such goods and bads for the purpose of policy analysis  As a general economic concept, what is the value of an environmental good (or bad)?  What methods do economists use to determine values of such goods and bads? For what sorts of situations does each method make sense?  Example: the damages from SO2 emissions; the value of preventing the spread of invasive species; the value of whooping crane conservation. How do we measure the costs of such things? Top 10 concepts of the class: #9 10 #10: Often the efficient level of an output –such as pollution or fish catch –is not known, or not politically relevant. Then the normative role of economics concerns cost-effectiveness (obtaining a desired output at least cost)  Show how does a tax on emissions assure a cost-effective (least-cost) allocation of emissions.  Show how ITQs assure a cost-effective allocation of fish harvest. Top 10 concepts of the class: #10 11 Example: Tradable Pollution Permits and ITQs  External costs involved…  …therefore too much production;  Government intervenes, sets the aggregate amount  May or may not be the amount consistent with economic efficiency (maximizing social net benefits).  The nature of the intervention is important  To maximize social net benefits we