Real flow runs counter clockwise-Money flow runs clockwise-Circular Flow ModelResiduals - materials entering the economy eventually are released back to enviormentChapter 1: Circular Flow & Materials Balance ModelSunday, February 10, 20134:18 PM Econ2100 Test 1 Page 1Acid rain program-Half of 1980 level -1990s Clean Air Act amendment Europeans walk about 237 miles a year Econ2100 Test 1 Page 2Europeans walk about 237 miles a yearAmericans walk about 87 miles a yearEuropeans bike about 116 miles a yearAmerican bike about 24 miles a yearMarket failure - missing markets or inefficient marketsEconomics - 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-Summary: Econ2100 Test 1 Page 3Input price-Production technology-Number of producers-Weather, disasters, etc.-Supply shiftersIncome-Price of related goods (substitutes or complements-Tastes and preferences-Population (# of consumers)-Weather, disasters, etc.-Demand shiftersPower markets are heavily regulated in US, except Cali-Crisis○Multiple large scale blackouts○One of largest energy companies went bankrupt○1988 - CA adopted deregulation policy that allowed a competitive markets for electricity-Consumers pay average price monthlyReason 1: consumers did not get the right price signals○Enron, energy traderReason 2: market manipulation○If producers and consumers cannot adjust quickly, the equilibrium cannot be restored quickly-Supply decreased and demand increased -- natural gas price increased-California Energy CrisisLimit set by regulators on the output/input/effluent levels directly○Command and control (CAC) - quotas-How consumers and producers share tax burden--doesn’t matter if $8 is levied on Market based incentives (MBI) - taxes-Quotas and TaxesIf: Supply shifts left - price is higher and quantity supplied is lowerDemand shifts right - price is higher and quantity demanded is higherChapter 2: Supply and DemandSunday, February 10, 20134:48 PM Econ2100 Test 1 Page 4How 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○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-Summary: Econ2100 Test 1 Page 5Utility - used to measure consumer's well-being•Economic good - anything that can affect consumer's utility•Ex. The existence of wolf (biodiversity)○Ex. Abatement of sulfer dioxide (better air quality)○Environmental quality/services are economic goods•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•Private good - food, computer, cup of coffeeOpen access - fisheryClub goods - pay television, theme parkPublic goods- clean air, waterMost environmental goods are public or open accessRivalExcludableYesNoYesNoPrivateOpenClubPublicPareto Improvement - one party better off, no one worse offPareto preferred - allocation after Pareto improvement to the allocation existed before(equivalent to equilibrium on graph)Pareto Optimum - when it is impossible to make one party better off without making another worse Property rights - entitlements that define the ownership, the owner's rights, privileges and limitations for use of the goods or resourcesa.Exclusivity-Transferability-Enforceability - to secure property right-An efficient property right structureb.Lack of ownership1.Ex. Fishery - "no incentive to conserve the fishery because next guy will take it anyway"-Goods are rival but cannot exclude others consumptionsa.Cause of overuse of resources because the benefits can be collected by one person but the cost is shared by all usersb."Tragedy of the commons"c.Open access2.Market failure - when markets do not allocate goods in Pareto improving mannerChapter 3: Market FailureSunday, February 10, 20135:09 PM Econ2100 Test 1 Page 6"Tragedy of the commons"c.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 tradea.Externality - occurs whenever the welfare of some agent depends not only on activities, but also on activities under the control of some other agent3.Air, water, sunshine, climate, national defense, existence of biology, nature conservationa.Nonrival & nonexcludable (see chart)b.Free riders - one who receives benefit without paying for itc.Public goods4.Current generation makes decisions based on what we think future generations wanta.Providing for the future5.Negative externality, abused use of open access resources, inadequate provision of public goods, etc.a.Government caused failure - government intervention decrease social welfare instead of increase6.Legislation, market based incentives, regulation, treaties between countries, etc - difficult across countiesa.Lack of enforcementb.Enforcement 7.Key terms:Abatement - refers to pollution reductionAppropriative 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 firstExistence 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 offImperfect public good - partially, but not wholly, diminished by the use and may or may not be excludablePecuniary effect - an affect on price of the item purchased Econ2100 Test 1 Page 7Prefer A to B, or B to A, or indifferentPreferences are complete - consumers can compare and rank bundles○Prefer A to B, B to C = A to CEnsures consumer is rational and choices are consistentPreferences are transitive○More is better - "I always prefer more of any good to less"○Consumers are rational - people choose to buy what they prefer/can afford○Consumer