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

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Presentation on theme: "Homework #1 Due Today 1 st Group Quiz - Monday Sept. 10th Writing Assignment Due Oct. 24th."— Presentation transcript:

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

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

3 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 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 Price of Good Quantity of Good Marginal Cost Marginal Benefit Equilibrium Price Equilibrium Quantity

6 Static 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 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity

8 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity

9 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity

10 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity

11 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)

12 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 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)

14 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity

15 Price of Good Quantity of Good Marginal Private Cost Demand Market Price Market Quantity Marginal Social Cost Q* P*

16 Consider the following supply and demand schedule for steel: Pri ce Qd Qs

17 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 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 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 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.

21 Pigovian Tax Problem Suppose the demand function for gasoline is P d = 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 P s =Q What is the market equilibrium level of output and price?

22 Pigovian Tax Problem Suppose the governments 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 If property rights are well- defined, and no significant transaction costs exist, an efficient allocation of resources will result even with externalities.

24 Price of Good Quantity of Good Marginal Private Cost Demand Market Price Market Quantity Marginal Social Cost Q* P*

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?

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


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