ECON 335 Key Terms and Concepts

goods that last a long time, used to produce other goods and services (ie buildings or computers)

natural resources, waste assimilation, life support, amenities

based on the 1st law of thermodynamics, matter/energy cannot be created or destroyed — waste is inevitable, inputs = outputs

entropy is increasing, many processes are irreversible, some things cannot be created or destroyed

the level and consumption of the 4 environmental services. the corresponding value of EQ is the monetary value of the 4 ES

the reduction in environmental quality due to the disposal of wastes

a model of benefits and costs at different quantities produced — benefit increases at a decreasing rate, cost increases at an increasing rate. Assumes that we are making a choice to maximize net benefit and that income is distributed in a socially acceptable way.

absent market failures, the equilibrium of a competitive market is pareto optimal. maximum social welfare = consumer surplus + producer surplus = maximum net benefits

a state in which it is impossible to make someone better off without making someone else worse off

a change in which someone is made better off without making anyone else worse off

a curve on which all points are pareto optimal

a bundle of entitlements that specify an owner’s rights, usage, and limitations to a resource

universality, exclusivity, transferability, enforceability

clearly defined ownership, breakdown caused by open-access resources

all benefits and costs from the use of a resource accrue only to its owner, breakdown caused by externalities (technological and reciprocal/CPR) and public goods

all property rights are transferable through voluntary exchange

property rights are secure from involuntary seizure or encroachment

a failure of competitive markets to produce efficient or pareto optimal outcomes

when the action of an economic agent has a direct (uncompensated), unintentional effect on the welfare or wellbeing of another economic agent; does not pass through a market. Can be positive or negative.

an indirect (compensated) unintentional effect on the wellbeing or welfare of another economic agent; passes through a market; does not lead to market failure. Can be positive or negative.

social costs that are greater than social benefits; missing out on a pareto improvement

if there are multiple market failures, correcting just one of them may make society worse off instead of better off

rival and excludable

nonrival and excludable

rival and nonexcludable

nonrival and nonexcludable

used to calculate the aggregate demand curve and obtain the marginal social benefit (MSB) curve of a public good. P = Pa+Pb at a given Q

where the private market provides/supplies a public good — leads to underprovision of the public good because of the free rider problem

an individual does not pay for a good because it has already been provided at the expense of another individual

caused by the tragedy of the commons, an externality imposed on other users of the resource

goods that are rival and nonexcludable but have a limited number of users ausers face a set of rules and restrictions

goods that are rival in use and nonexcludable, and are owned by no one. These lead to a breakdown in universality and the tragedy of the commons.

profit at a certain quantity under private ownership, given by VTP(x) - TC(x) or the area under VMP(x) and above MC(x) before X*. Rents = 0 at the open access equilibrium (Xoa)

where MB = MC in an open access scenario; rents = 0; given by VAP(x)=MC; akin to overexploiting a resource

players communicate and make binding agreements

players work in isolation

players make decisions at the same time

players make decisions at different times/taking turns

a simultaneous-move, non-coordination game theory scenario in which all quadrants but (I) are pareto optimal and the dominant strategy equilibrium is to keep extracting a resource (leading to outcome (I) at the Xoa equivalent). By relying on this game, we assume that all OARs will result in the tragedy of the commons.

a simultaneous-move, non-coordination game theory scenario in which there is no dominant strategy/equilibrium. Results in a Nash Equilibrium

a set of strategies in which there is no unilateral incentive to deviate from the agreement to stop consuming an OAR

intervention to correct a market failure that leads to the creation of distorted or improper incentives relative to what is socially desirable.

1) there is a market failure

2) intervention must yield some benefits

3) benefits must exceed costs

1) unforseen/unanticipated consequences (ex New Source Performance Standards in the CAA discourage innovation gains)

2) piecemeal/successive government intervention (ex CWA followed by CAA led to a solid waste problem)

3) rent-seeking behaviors (ex lobbying)

4) subsidies (ex tarrifs, firms not paying costs of pollution)

expending resources to benefit one individual or group at the expense of others by influencing legal or political decisions

the most egregious government failure in terms of environmental degradation; a government-directed, market-distorting intervention which decreases the cost of production or increases the consumer-price of a good or service. Can be justified (redistributive tax credits or investment in renewables) or unjustified (protectionism or subsidizing fossil fuels)

1) overcapitalization effect

2) technology effect

3) resource inefficiency effect

4) public resource deprivation effect

more investment in a sector than there would be without the subsidy (ie corn subsidies)

use of technologies that are harmful to the environment (caused by fossil fuel subsidies)

not paying for a resource leads to less incentive to conserve that resource (ie water subsidies)

selling public domain resources at lower costs deprives the public of financial benefit (ex logging on federal land for cheaper than private market cost of lumber)

firm-level costs of compliance, estimated using information reported to the government or data on revenues and costs (to estimate lost profits). deficiencies include: biased estimates, firms may not be able to distinguish between environmental and production costs, accounting costs may not coincide with true economic costs

effects on economic productivity, employment, investment (displaced overseas)

value exchanged in private markets

direct value to an individual; include use-value and nonuse value (option value and existence value)

TB = production value + use value + option value + existence value

existence value (snail darter example)

a means of evaluating benefits by asking consumers their willingness to pay

a means of evaluating benefits by observing behavior in related markets to infer willingness to pay

survey-based method to reveal WTP, the only method that can estimate non-use value. Used in stated preference approach.

the most important bias from CV, respondents faced with a contrived set of choices may not respond accurately.

incentive compatibility and consequentiality — if not met, the WTP is overestimated; if met, the WTP is underestimated

belief that your response matters and will be taken into account

belief that provision determined by responses will impact wellbeing

bias in CV, respondents are not fully informed of the benefits and costs of an action

bias in CV, related to how an action is being funded (tax vs individual fee)

bias in CV as a result of the order in which the question was asked (whatever is shown first is estimated to be of higher value)

bias in CV either towards a large scope of preservation (increase in WTP) or people are willing to pay less per unit for a bigger impact

travel-cost method, hedonic-housing price method, hedonic wage rate method, defensive expenditures method

infers marginal WTP for environmental quality from travel decisions. assumes that changing an entry fee has the same impact as changing travel costs and that if people travel to a park then benefits>costs.

used to estimate marginal WTP for environmental quality — differences in housing prices should reflect differences in EQ so long as all other differences are controlled for

estimates marginal WTP for reduced exposure to environmental hazards using wage rates to reflect differences in EQ. Issue: no two occupations are the same in all other aspects

relies on purchased inputs to mitigate effects of pollution, ex. people buy bottled water to avoid contaminated water. WTP = price/input(number of inputs bought after contamination - number of inputs bought before contamination)

what a group is willing to pay for a reduction in risk of mortality/morbidity by the equivalent of one or more premature death

marginal WTP/change in risk OR total WTP/change in premature deaths

the preferred policy is the one with the highest net benefit. if there is only one policy, it is accepted only if net benefits are positive

if we don’t put a price on the environment then we will have ill-informed tradeoffs

the Kaldor-Hicks Compensation Criterion says that if winners can compensate the losers and both groups are still better off than before, then a policy is still desirable

1. change in production technology

2. change in inputs

3. change in output (reducing quantity, changing product type)

4. installation of end-of-pipe technology

1. assimilative capacity (how much the environment can abate on its own)

2. horizontal zone of influence

3. vertical zone of influence

a pollutant that the environment has little to no assimilative capacity for

a pollutant that the environment has some assimilative capacity for (up to a certain point)

a pollutant that doesn’t move from its source

a pollutant that moves from its source

a ground-level pollutant

an atmospheric pollutant

marginal benefit to the firm

marginal benefit to society

marginal cost to society

marginal cost to the firm

if property rights are well-defined, the private market can achieve the socially optimal level of wastes (w*) through bargaining (without government intervention)

a policy instrument in which governments command firms to control their output, generally by enforcing standards

a policy instrument in which actions are incentivized using market mechanisms

combines market based and command-control strategies

= AC = area under MAC to w*

= AC(w*) + tw*

= AC(w*)-sub*(ŵ-w*)

Π(t) < Π(stnd) < Π(no reg) < Π(sub)

how much do we allow each firm to emit so that:

1) w1 + w2 = wT*

2) sum ACt = AC1 + AC2 is minimized

in other words: how to minimize the total abatement costs for both firms

choose w1 and w2 such that MAC(w1) = MAC(w2)