Quantitatively Relates Outputs To Levels Of Inputs - Economics Assignment Help

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INTRODUCTORY CONCEPTS

Inputs vs. outputs – factors of production, e.g. land/resources, labour, capital vs. final goods and services

Production function – quantitatively relates outputs to levels of inputs

Circular flow - This describes the basics of a market economy. However, the traditional circular flow model does not consider the environment.

Natural vs. produced capital: stock of resources provided by nature (environment as asset) vs. manufactured goods used in production.

Ecological economics - "examines the interaction between ecological systems and the economy such that economic activity can be consistent with sustaining and enhancing ecological systems".

Steady State Economy (Herman Daly): An alternative approach to the standard economic model, recognizing the biophysical limits of the planet’s ecosystem and requiring constant population and capital stock. 
DEMAND THEORY

Def. utility - "the psychic satisfaction that a person receives from the consumption / use of goods and services". Utility is immeasurable (Bentham and the Utilitarians).

Def. marginal utility - "change in utility with an incremental change in consumption / use"

Def. law of diminishing marginal utility - "marginal utility assumed to decline with increased consumption / use"

Def. demand curve as the marginal willingness to pay curve.  

Def. market demand curve - "horizontal sum of consumers' demand curves"

Def. consumers' surplus - "difference between the total value of consumption and the total amount paid (area under the demand curve and above the price)"
SUPPLY THEORY

Def. opportunity cost - "measuring the cost of something by the value of its next best alternative use"

Def. average cost – “cost per unit of output” or C / Q

Def. marginal cost - "cost of producing the next unit" or ΔC / ΔQ

Def. short run - "period during which some inputs (notably capital) cannot be changed"

Def. long run - "period during which all inputs can be changed"

Def. law of diminishing marginal productivity (diminishing returns) - "additional variable inputs (say labour) to a fixed input (say capital) will eventually lead to a declining rate of output for each additional input"

Def. market supply curve - "horizontal sum of firms' supply curves"

Def. producers' surplus - "difference between the total variable cost of production and the total revenues received" (area above MC curve and below the price)
ELASTICITY

Def. price elasticity of demand - "percentage change in quantity demanded with a percentage change in price"

Price elasticity of demand = %ΔQ / %ΔP = (ΔQ/Q) / (ΔP/P) = ΔQ/ΔP * P/Q

Inelastic means that a 1% change in price will result in a less than 1% change in demand.  

Elastic means that the resulting change in demand will be greater than 1%.  
MARKET FAILURE

Def. market failures - "conditions under which freely functioning markets fail to maximize social welfare"

Def. externality - "negative or positive effect not accounted for in the price of a good or service"

Def. common pool resource - "resource for which it is difficult to allocate property rights and to which access is difficult to restrict” Where no property rights exist, refer to this as an open access resource.

Def. public good - "good or service that is characterized by both non-exclusivity and non-rivalry". Non-exclusive means that it cannot be withheld from specific users.  Non-rivalrous means that one user does not affect another – both can benefit while using the same good.  

Def. natural monopoly – “exists where demand is low relative to optimal firm size (costs minimized with only one firm) , e.g. electric utilities, pipelines, railroads. They need to be subsidized or controlled by government to maximize social welfare.

COST-BENEFIT ANALYSIS
Steps in a Cost-Benefit Analysis (CBA) – we discussed 5 steps in a CBA plus the need to carry out a distribution/fairness analysis to understand who gains/loses.

Discounting – technique used to allow for benefits/costs from different time periods and to put these on a similar footing. We express the discount factor as 1/(1+r)t, where r is the discount rate (DR). The latter can be set using the social time preference rate governing consumption decisions, or the marginal opportunity cost of capital rate applied to investment expenditures.

Net present value (NPV) - calculated as the difference between the present values of benefits and costs. Decision rule for a viable project is NPV > 0.

Benefit cost ratio (BCR) – calculated as the present value of benefits divided by the present value of costs. Decision rule for a viable project is BCR > 1.

Internal rate of return (IRR) - estimates the discount rate that yields an NPV = 0. Decision rule for a viable project is IRR>DR.

Sensitivity analysis: Addresses reliability of data and parameters and potential uncertainty of impacts and measurement by systematically varying key assumptions to determine which are most influential on results. 

Issues with CBA – these include problems of ecosystem complexity/uncertainty, discounting and intergenerational issues, institutional capture, and whether it’s worth doing CBA at all. 

VALUING THE ENVIRONMENT
Non-market valuation - techniques that can establish surrogate prices for environmental goods and services when no market price exists.

Total Economic Value (TEV) - refers to the sum of use value and non-use value. The former can be divided into direct uses (harvesting, etc.) and indirect uses (ecosystem services). 

Millenium Ecosystem Assessment and ecosystem services – this classification approach organizes ecosystem services according to whether they are provisioning, regulating, cultural or support services. 

Willingness to pay (WTP) – the maximum amount of money you are willing to give up (pay) to obtain a specified environmental improvement.

Willingness to accept compensation (WTA) – the minimum amount of money you are willing to accept in compensation to give up something such as an environmental benefit.

Stated preference valuation techniques – these involve constructed markets for valuing environmental improvement and include contingent valuation (CVM) and choice experiments.

Revealed preference valuation techniques – these used observed consumer behavior in markets to infer values for the environment. Approaches include the hedonic price method (HPM) and travel cost method (TCM).

Production function approach - makes use of production functions to model the contribution of an environmental input to some marketed output. 
Benefits transfer – the practice of extrapolating existing information on the non-market value of ecosystem goods or services; preferred technique is called ‘benefits function transfer’.

THE ECONOMICS OF POLLUTION
Damage function - relates emissions or concentrations of the pollutant to a money value of the damages at that level of pollution.

Abatement costs - the costs of controlling or abating pollution emissions/effluent directly, thereby resulting in reduced damages. 

Marginal damage curve - the incremental damages incurred from a small increase in emissions of a pollutant; it also represents the benefits which can be obtained by reducing the level of pollution. Thus, the marginal damage curve can also be thought of as a marginal willingness to pay curve for pollution abatement on the assumption people are WTP no more than the damages they avoid.

Marginal abatement cost curve – same as abatement costs but expressed in terms of the incremental control costs incurred when there is a small decrease in emissions of a pollutant.

Equi-marginal principal - states that total costs of abatement are minimized where each agent is reducing emissions up to that point where the marginal abatement cost (MAC) for every agent is equal.

Optimal level of pollution - efficient level of residual emissions and pollution abatement; determined where marginal damage is equal to the marginal abatement cost and the sum or total abatement costs and total (residual) damages are minimized.

Environmental policies – these include non-interventionist policies, correction of policy failures, command and control approaches and economic instruments.
 
Criteria for policy evaluation – we considered the following criteria: an efficiency criterion (abatement at least cost), an equity criterion (fairness), enforcement criterion (monitoring and enforcing) and an improvement criterion (incentives to adopt new technologies).

Moral Suasion - refers to the use of programs intended to persuade individuals to behave in an environmentally responsible way voluntarily, by appealing to their moral values or civic duty. 

Coase Theorem – Argues as long as property rights are vested in one party, the socially optimal level of pollution control can be reached (theoretically, at least) through a process of free bargaining. However, various conditions must be met for it to work.

Regulatory or command and control approaches – institutional measures aimed at directly coercing environmental performance by regulating processes or products used, abandoning or limiting the discharge of certain pollutants, through licensing, setting of standards, zoning, etc.

Economic instruments - provide monetary incentives for voluntary, non-coerced action by polluters for the purpose of environmental improvement.

Pigovian (pollution or green) tax - an emissions tax applied on the basis that polluters should pay for the use of the environment's services. It is intended to internalize pollution externalities and is set equal to marginal damages at the optimal pollution level. 

Marketable Permits (cap and trade) - combines the use of standards with the creation of a market for the buying/selling of rights to pollute. It involves setting a cap then distributing permits up to that cap and allowing permit trades. Important issues are the allocation mechanism for permits, the complexity of such a system and the potential for hoarding of permits.

Deposit-Refund Systems are a mixed tax-subsidy technique involving a deposit (tax) paid initially, followed by a refund (subsidy) upon avoidance of some polluting activity or return of a polluting product. 

 

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