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Class:ECON 2100 - ECON OF ENV QUALITY
Subject:Economics
University:University of Georgia
Term:Spring 2012
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Factors of Production
  • Inputs into the production process.
Natural Pollutants
  • Arise from non-artificial processes
  • Example: Sea salt spray
Anthropogenic Pollutants
  • Are of more concern to environmental economists than natural pollutants
  • Come from residuals associated with consumption and production
  • Examples: CO2, Lead, Mercury
Why are Technology Based Standards not cost effective? They force firms to adopt standards that may not be the lowest cost.
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Market Demand Curve Represents the sum of the quantities demanded by all buyers at each price of the good.
An increase in demand is represented by? A rightward shift of a demand curve.
Coarse theorem Suggests that private solutions to an externality problem will usually allocate resources efficiently if private parties can bargain without cost.
Shortage of a Good at the Current Price Means the price is below the equilibrium price.
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Willingness to Pay Measures the value that a buyer places on a good.

Also referred to as demand price.

Considered a measure of the marginal benefit (MB) associated with consuming another unit of the good.
Government Regulations on Businesses Example: If a sawmill creates too much noise for local residents, the government can raise economic well-being through noise-control regulations.
Supply Curve of a Product Reflects the cost to sellers of producing the product.
Cost of Externality The difference between social cost and private cost.

Also known as MEC.

MEC = MSC - MEC
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Public Goods Without Government Intervention Underproduced and common resources tend to be over-consumed.
Negative Externalities in Markets Lead markets to produce greater than efficient levels and positive externalities lead markets to produce smaller than efficient output levels.
Law of Demand When the price of a good decreases, buyers purchase more of the good.
Coase Theorem Efficient Solution Bargaining over private goods without costs.

Example: Assume that your roommate is very messy. According to campus policy, you have the right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to pay you at least $100 but less than $200 to live with the clutter.
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Good Excludability People can be prevented from using the good.
Public Goods Not excludable, and, as a result, people have an incentive to be free-riders.
Competitive Equilibrium Price MPC = MPB

Marginal Private Cost = Marginal Private Benefit
Efficient Equilibrium Quantity MSC = MSB

Marginal Social Cost = Marginal Social Benefit
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Payment for Negotiating Parties over Natural Resources Range (MSC - MPC) > p > (MPB - MPC)

MEC > p > M(Pi)

Marginal External Cost > payment > M(Pi)


Government Action Needed when private solutions fail to arise because externalities tend to keep markets from reaching a socially optimal equilibrium.
Surplus in a Market vs. Actual Price The actual price is above the equilibrium price and quantity supplied is greater than quantity demanded.
Equilibrium Quantity in Markets QmD = QmS

Quantity Market Demand = Quantity Market Supply

                   Demand                       Supply
Example: Q1 = 25 - P                 Q1 = P - 15
                  Q2 = 75 -2P                Q2 = 4P - 65
                  Q3 = 200 - 2P             Q3 = 5P - 70
                QmD = 300 - 5P          QmS = 10P - 150
Set the two equal to one another and solve for Q. Answer = 150
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Since almost all forms of transportation produce some type of pollution... Society has to weigh the cost and benefits when deciding how much pollution to allow.
Materials Balance Market Residuals flow from both households and firms.
Anthropocentrism "We should take actions based on maximizing the value of humans, despite the costs it imposes on biodiversity."
Biocentrism Puts the environment at the center of decisions

Example: Preserving the environment to the highest possible degree.
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Precautionary Principle Taking precautions for something not to happen.

Example: Global Warming

  • No definitive impact of CO2 to environment
  • No exact scientific relationship = No policy to protect entirely
Sustainability Consumption patterns today so that future generations can be as well off as we are.

Example: Fish in the ocean

Problem: Over Fishing - should not consume more fish that would prohibit the fish population from bouncing back in the future.
Efficient Environmental Standards There are regional differences in population levels and thus how many people are affected. (Regional Standards)
Stationary Source Example: Factory
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Mobile Source Example: Car
Point Source Example: Smoke Stack
Non-Point Source Example: Farm-Runoff from Pesticides
Consumer Surplus The amount a consumer is willing to pay minus the amount the consumer actually pays.
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Factors of the Population Paradox
  1. High population growth rates in developed countries
  2. Lack of education
  3. High infant mortality rates
Calculating Producer Surplus Estimated by the excess of market price (P) over marginal cost (Cost), aggregated over all units sold.
Command-and-Control Policy The government creates policies that directly regulate behavior to solve an externality.
Quantity Demanded of a Product The amount that buyers are willing and able to purchase at a particular price.
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Market Characterized by Externalities The market equilibrium fails to maximize the total benefit to society as a whole.
Social Cost of Pollution Includes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.
Internalizing a Negative Externality When firms internalize a negative externality, the market supply curve shifts to the left. (Cost goes up)
Rival Characteristic of a private good in a competitive market. 
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Nonrivalness The characteristic of indivisible benefits of consumption such that one person's consumption does not preclude that of another.
Excludable Characteristic of a private good in a competitive market. 
Non-excludability The characteristic that makes it impossible to prevent others from sharing in the benefits of consumption.
Dead Weight Loss DWL = CS + PS
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 Factors of Production
  • Inputs into the production process.
 Natural Pollutants
  • Arise from non-artificial processes
  • Example: Sea salt spray
 Anthropogenic Pollutants
  • Are of more concern to environmental economists than natural pollutants
  • Come from residuals associated with consumption and production
  • Examples: CO2, Lead, Mercury
 Why are Technology Based Standards not cost effective?They force firms to adopt standards that may not be the lowest cost.
 Market Demand CurveRepresents the sum of the quantities demanded by all buyers at each price of the good.
 An increase in demand is represented by?A rightward shift of a demand curve.
 Coarse theoremSuggests that private solutions to an externality problem will usually allocate resources efficiently if private parties can bargain without cost.
 Shortage of a Good at the Current PriceMeans the price is below the equilibrium price.
 Willingness to PayMeasures the value that a buyer places on a good.

Also referred to as demand price.

Considered a measure of the marginal benefit (MB) associated with consuming another unit of the good.
 Government Regulations on BusinessesExample: If a sawmill creates too much noise for local residents, the government can raise economic well-being through noise-control regulations.
 Supply Curve of a ProductReflects the cost to sellers of producing the product.
 Cost of ExternalityThe difference between social cost and private cost.

Also known as MEC.

MEC = MSC - MEC
 Public Goods Without Government InterventionUnderproduced and common resources tend to be over-consumed.
 Negative Externalities in MarketsLead markets to produce greater than efficient levels and positive externalities lead markets to produce smaller than efficient output levels.
 Law of DemandWhen the price of a good decreases, buyers purchase more of the good.
 Coase Theorem Efficient SolutionBargaining over private goods without costs.

Example: Assume that your roommate is very messy. According to campus policy, you have the right to live in an uncluttered apartment. Suppose she gets a $200 benefit from being messy but imposes a $100 cost on you. The Coase theorem would suggest that an efficient solution would be for your roommate to pay you at least $100 but less than $200 to live with the clutter.
 Good ExcludabilityPeople can be prevented from using the good.
 Public GoodsNot excludable, and, as a result, people have an incentive to be free-riders.
 Competitive Equilibrium PriceMPC = MPB

Marginal Private Cost = Marginal Private Benefit
 Efficient Equilibrium QuantityMSC = MSB

Marginal Social Cost = Marginal Social Benefit
 Payment for Negotiating Parties over Natural Resources Range(MSC - MPC) > p > (MPB - MPC)

MEC > p > M(Pi)

Marginal External Cost > payment > M(Pi)


 Government ActionNeeded when private solutions fail to arise because externalities tend to keep markets from reaching a socially optimal equilibrium.
 Surplus in a Market vs. Actual PriceThe actual price is above the equilibrium price and quantity supplied is greater than quantity demanded.
 Equilibrium Quantity in MarketsQmD = QmS

Quantity Market Demand = Quantity Market Supply

                   Demand                       Supply
Example: Q1 = 25 - P                 Q1 = P - 15
                  Q2 = 75 -2P                Q2 = 4P - 65
                  Q3 = 200 - 2P             Q3 = 5P - 70
                QmD = 300 - 5P          QmS = 10P - 150
Set the two equal to one another and solve for Q. Answer = 150
 Since almost all forms of transportation produce some type of pollution...Society has to weigh the cost and benefits when deciding how much pollution to allow.
 Materials Balance MarketResiduals flow from both households and firms.
 Anthropocentrism"We should take actions based on maximizing the value of humans, despite the costs it imposes on biodiversity."
 BiocentrismPuts the environment at the center of decisions

Example: Preserving the environment to the highest possible degree.
 Precautionary PrincipleTaking precautions for something not to happen.

Example: Global Warming

  • No definitive impact of CO2 to environment
  • No exact scientific relationship = No policy to protect entirely
 SustainabilityConsumption patterns today so that future generations can be as well off as we are.

Example: Fish in the ocean

Problem: Over Fishing - should not consume more fish that would prohibit the fish population from bouncing back in the future.
 Efficient Environmental StandardsThere are regional differences in population levels and thus how many people are affected. (Regional Standards)
 Stationary SourceExample: Factory
 Mobile SourceExample: Car
 Point SourceExample: Smoke Stack
 Non-Point SourceExample: Farm-Runoff from Pesticides
 Consumer SurplusThe amount a consumer is willing to pay minus the amount the consumer actually pays.
 Factors of the Population Paradox
  1. High population growth rates in developed countries
  2. Lack of education
  3. High infant mortality rates
 Calculating Producer SurplusEstimated by the excess of market price (P) over marginal cost (Cost), aggregated over all units sold.
 Command-and-Control PolicyThe government creates policies that directly regulate behavior to solve an externality.
 Quantity Demanded of a ProductThe amount that buyers are willing and able to purchase at a particular price.
 Market Characterized by ExternalitiesThe market equilibrium fails to maximize the total benefit to society as a whole.
 Social Cost of PollutionIncludes the private costs of the producers plus the costs to those bystanders adversely affected by the pollution.
 Internalizing a Negative ExternalityWhen firms internalize a negative externality, the market supply curve shifts to the left. (Cost goes up)
 RivalCharacteristic of a private good in a competitive market. 
 NonrivalnessThe characteristic of indivisible benefits of consumption such that one person's consumption does not preclude that of another.
 ExcludableCharacteristic of a private good in a competitive market. 
 Non-excludabilityThe characteristic that makes it impossible to prevent others from sharing in the benefits of consumption.
 Dead Weight LossDWL = CS + PS
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