Chapter 1 Circular Flow Materials Balance Model Sunday February 10 2013 4 18 PM Circular Flow Model Real flow runs counter clockwise Money flow runs clockwise Residuals materials entering the economy eventually are released back to enviorment Econ2100 Test 1 Page 1 1990s Clean Air Act amendment Acid rain program Half of 1980 level Europeans walk about 237 miles a year Econ2100 Test 1 Page 2 Europeans walk about 237 miles a year Americans walk about 87 miles a year Europeans bike about 116 miles a year American bike about 24 miles a year Market failure missing markets or inefficient markets Summary Economics allocation of scarce resources Environmental issues arise from the interaction between people and nature Environmental economics uses the tools of economics to analyze environmental issues Markets are powerful because they decide prices and prices can change people s choices However for many environmental goods markets are missing or do not work efficiently Econ2100 Test 1 Page 3 Chapter 2 Supply and Demand Sunday February 10 2013 4 48 PM Supply shifters Input price Production technology Number of producers Weather disasters etc Demand shifters If Supply shifts left price is higher and quantity supplied is lower Demand shifts right price is higher and quantity demanded is higher Income Price of related goods substitutes or complements Tastes and preferences Population of consumers Weather disasters etc California Energy Crisis Power markets are heavily regulated in US except Cali 1988 CA adopted deregulation policy that allowed a competitive markets for electricity Crisis Multiple large scale blackouts One of largest energy companies went bankrupt If producers and consumers cannot adjust quickly the equilibrium cannot be restored quickly Reason 1 consumers did not get the right price signals Consumers pay average price monthly Reason 2 market manipulation Enron energy trader Supply decreased and demand increased natural gas price increased Quotas and Taxes Command and control CAC quotas Limit set by regulators on the output input effluent levels directly Market based incentives MBI taxes How consumers and producers share tax burden doesn t matter if 8 is levied on Econ2100 Test 1 Page 4 How consumers and producers share tax burden doesn t matter if 8 is levied on consumer or on producer Ex 31 to producers 8 to regulators 39 paid by consumers Summary Focus on market failure Market could stay in disequilibrium Quota and tax can both help reduce pollution but they have different effects on producer and government revenue Econ2100 Test 1 Page 5 Chapter 3 Market Failure Sunday February 10 2013 5 09 PM Utility used to measure consumer s well being Economic good anything that can affect consumer s utility Environmental quality services are economic goods Ex The existence of wolf biodiversity Ex Abatement of sulfer dioxide better air quality Rival good when use by one person precludes the use by another person Excludable good when consumers can be prevented from using the good Rivalry and excludability are matters of degrees not absolutes Excludable Yes No Private good food computer cup of coffee Open access fishery Club goods pay television theme park Public goods clean air water Private Open Most environmental goods are public or open access Yes Rival No Club Public Pareto Improvement one party better off no one worse off Pareto preferred allocation after Pareto improvement to the allocation existed before Pareto Optimum when it is impossible to make one party better off without making another worse equivalent to equilibrium on graph Market failure when markets do not allocate goods in Pareto improving manner 1 Lack of ownership a b Property rights entitlements that define the ownership the owner s rights privileges and limitations for use of the goods or resources An efficient property right structure Exclusivity Transferability Enforceability to secure property right 2 Open access a Goods are rival but cannot exclude others consumptions Ex Fishery no incentive to conserve the fishery because next guy will take it anyway b c Cause of overuse of resources because the benefits can be collected by one person but the cost is shared by all users Tragedy of the commons Econ2100 Test 1 Page 6 c Tragedy of the commons 3 Externality occurs whenever the welfare of some agent depends not only on activities but also on activities under the control of some other agent Ex Pollution participants in market have no reason to think about the effects of their activities on third parties even if third party suffers from their trade 4 Public goods Air water sunshine climate national defense existence of biology nature conservation Nonrival nonexcludable see chart Free riders one who receives benefit without paying for it 5 Providing for the future a Current generation makes decisions based on what we think future generations want Government caused failure government intervention decrease social welfare instead of increase 6 Negative externality abused use of open access resources inadequate provision of public goods etc 7 Enforcement Legislation market based incentives regulation treaties between countries etc difficult across counties Lack of enforcement a a b c a a b Key terms Abatement refers to pollution reduction Appropriative water rights 1 allow a person to take a specific amount of water from a water course 2 the person must take the water from the watercourse and use it for beneficial purpose usually irrigated agriculture 3 when there is insufficient water to meet all claims water is allocated first to those who filed their claims first Existence service a good from which people benefit even if they have no direct experience or contact with it the mere fact that the good exists makes them better off Imperfect public good partially but not wholly diminished by the use and may or may not be excludable Pecuniary effect an affect on price of the item purchased Econ2100 Test 1 Page 7 Chapter 4 Consumer Behavior Sunday February 10 2013 5 42 PM Consumer theory Consumer preferences indifference curves Preferences are complete consumers can compare and rank bundles Prefer A to B or B to A or indifferent Preferences are transitive Prefer A to B B to C A to C Ensures consumer is rational and choices are consistent More is better I always prefer more of any good to less Consumers are rational people choose to buy what they prefer can afford Indifference curves a curve representing all bundles that