1. Upcoming in Class Homework #1 Due Today
1st Group Quiz - Monday Sept. 10th
Writing Assignment Due Oct. 24th

2. HW1 – Problem 1
What is the difference between a common good, a public good, and an open-access good?
Give examples.

3. HW1 –Problem 2
What is willingness-to-pay? What is your WTP for a dozen eggs from Meijer? What is your WTP for a dozen farm fresh eggs from organically raised free-range chickens? Explain why they are different.

4. HW1 – Problem 3
Assume a change in the quality of a good results in an increase in consumers’ WTP. Assume also that the supply of the good is unchanged. Illustrate this situation graphically and identify the change in net benefits attributable to the change in quality.

5. Max. Net Benefit Price of Good Marginal Cost Equilibrium Price
Marginal Benefit
Quantity of Good
Equilibrium Quantity

6. Static Model Dynamic Model Time does not matter
Cost/Benefit Analysis – cutting down trees
Benefit > Cost => support action
Cost > Benefit => oppose action
Dynamic Model
Account for time
Cost/Benefit Analysis accounting for time
Max [B0, B1, B2]
Present Value – $1 invested today at 10% interested yields $1.10 a year from now.
Present Value (PV) of X one year from now is X/(1+r)2
r is the interest rate (discount rate)
PV[Bn]=Bn/(1+r)n

7. Market Equilibrium Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

8. Consumer Surplus Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

9. Producer Surplus Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

10. Total Welfare Price of Good Supply Equilibrium Price Demand
Quantity of Good
Equilibrium Quantity

11. Well-Defined Property Rights
Exclusivity –
All benefits and costs accrued as a result of owning and using the resources should accrue to the owner, and only the owner, either directly or indirectly by sale to others
Transferability –
All property rights should be transferable from one owner to another in a voluntary exchange
Enforceability –
Property rights should be secure from involuntary seizure or encroachment by others (ie. eminent domain)
Examples of poorly defined rights-
Exclusivity:
Pollution,
Transferability:
Snickers Bar example
Rafting Demand
Enforcement:
Libya Civil War En
Elephants -
Note – Eminent domain is the inherent power of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent.
Example, Haiti & Dominican Republic

12. A Note on Rights
Efficient Property Rights => Net Benefits are Maximized
Consumer Surplus – area under the demand curve minus the area representing cost
Producer Surplus – area under the price line that lies over the marginal cost curve
Net Benefits = CS + PS

13. Externalities as a Source of Market Failure
Exclusivity – when the owner bears all of the consequences of his actions
Externality – when the welfare of some agent (individual, household, or firm) depends on the activities under control of some other agent.
Negative externalities (external diseconomy)
Positive externalities (external economy)
Externality – what you do affects me.
Negative Externalities –
Pollution
Second hand smoke
Over-fishing
Positive Externalities –
Donations to save the Rain forest
Vegetarians

14. Market for Electricity
Price of Good
Supply
Equilibrium Price
Demand
Quantity of Good
Equilibrium Quantity

15. Market for Electricity with Externalities
Price of Good
Marginal Social Cost
Marginal Private Cost P*
Market
Price
Consumer Surplus with externality
Producer Surplus with externality
Max possible benefits
Total external costs = total cost of pollution
Socially efficient level of output.
Demand
Quantity of Good Q*
Market
Quantity

16. HW 1 – Problem 4
Consider the following supply and demand schedule for steel:
Price 20 40 60 80
100
120
140
160
180 Qd
200 Qs
220
260
300
340

17. HW 1 – Problem 4
Pollution from steel production is estimated to create an external cost of sixty dollars per ton.
Show the external cost, market equilibrium, and social optimum on a graph.

18. HW 1 – Problem 4
What kinds of policies might help to achieve the social optimum? How would this policy affect consumers? How would this policy affect producers? What effect would the policy have on market equilibrium price and quantity? 

19. Dealing with Externalities
The Pursuit of Efficiency
Legislative and Executive Regulation
Direct Control – Quota
Cap and Trade
Pigovian Tax – “polluter pays principle”
Not always clear who pays

20. How would you graph a positive externality?
Example, when Duncan Hines produces brownie mix, it pollutes a small amount of cocoa powder into the air. This makes the air smell like brownies, and increase the MSB from the production of brownies.
Brownie Smells -

21. Pigovian Tax Problem Suppose the demand function for gasoline is
Pd = Q where Q represents billions of gallons of gasoline.
Suppose the supply function for gasoline is based on the firms’ marginal private costs and equals
Ps=Q
What is the market equilibrium level of output and price?

22. Pigovian Tax Problem
Suppose the government’s EPA determines the socially optimal amount of gasoline use is actually 3 billion gallons of gasoline.
To reach this socially optimal quantity, the government is going to implement a per unit tax on the consumption of gasoline. The tax revenue from which will go to protecting the environment as determined by the EPA.
What should the tax amount be?
What price will the consumers pay?
What price will the sellers receive?
How much money will go to protecting the environment?

23. Coase Theorem
If property rights are well-defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities.

24. Market for Electricity with Externalities
Price of Good
Marginal Social Cost
Marginal Private Cost P*
Market
Price
How you can save the world is to find the MSC.
Demand
Quantity of Good Q*
Market
Quantity

25. Coase Theorem Problem
A chemical factory is situated next to a farm. Airborne emissions from the chemical factory damage crops on the farm. The marginal benefits of emissions to the factory and the marginal costs of damage to the farmer are as follows
MB= 360 – 0.4 Q and MC=90+0.2Q
From an economic viewpoint, what is the best solution to this environmental conflict of interest?
How might this solution be achieved?
Optimal q=450 of the pollutant and MC=MB=180. If the farmer has the right to say how much to pollute, the company can offer up to $180 per unit of pollution to allow 450 units of pollution. The farmer also benefits from the first 450 units of pollution and receives $180 for each. Company pays B+C but gains A+B+C. Net profit is area A. If the company has the right to pollute, the would pollute 900 units. But the farmer could pay the company not to pollute paying up to $180 per unit for 450 units (area D+E). The farmer still incurs the cost of area C. The company’s net gain is A+B+C+D+E. Scenario 1) Farmer gains = B Company gains= A. Scenario 2) Farmer pays= D+E and suffers C. Company gains= A+B+C+D+E Both Scenarios) Net gain to society is $60,750

26. Upcoming in Class Homework #1 Due Thursday Group Quiz Next Thursday
Writing Assignment Due Oct. 27th