Slide 1

The Self-Extinction Premise A society can germinate the seeds to its own destruction. Malthusian view Pop. Growth cant keep up with our use of Oil, fish, forests, fresh water, clean air Examples Easter Island Reliance and overuse of trees led to downfall Mayan civilization Pop. Growth > Food Supply Slide 2 Resources are scarce, but we will find substitutes or innovation will lead to more efficient use of the resource necessity is the mother of invention Slide 3 1. History shows that when faced with scarcity, societies always correctly adapt to solve the problem. 2. History gives no clues as to whether societies correctly adapt to solve problems of scarcity. 3. History shows that when faced with scarcity, societies never adapt to solve the problem. Slide 4 Natural Resource resources that occur in a natural state and are valuable for economic activity Exhaustible, Non-renewable resources Resources that are fixed in amount of the resource which may be used up over time. Examples include fossil fuels, minerals such as iron, silver, and gold. Renewable resources Resources that can be regenerated over time. Examples, Depletable A renewable resource that can be exploited and depleted, such as soil and clean air. Slide 5 1. Exhaustable 2. Depletable Slide 6 1. Exhaustable 2. Depletable Slide 7 1. Exhaustable 2. Depletable Slide 8 1. Exhaustable 2. Depletable Slide 9 Excludable Non-Excludable Non-Rivalrous Rivalrous Club Goods Public Goods Common Goods Private Goods Fish, hunting game, grazing land National defense, lighthouses, clean air, information goods Food, clothing, toys, cars Satellite television, Golf courses, Cinemas Slide 10 How much rainforest do we really need? I want to maximize wealth and societal welfare. In order to figure that out, I need to know how many trees I should grow AND I need to know how much paper people use. Slide 11 Marginal Analysis Tool used to answer questions of how much?, by examining very small changes. Benefits > Cost => Do more Benefits Do less Examples, Valuing the Resources Economic value of the a tree Anthropocentric view Direct value of trees existence- can make a chair out of it Indirect value reducing carbon dioxide in air, protecting the environment from global warming, pretty and other like it Slide 12 Willingness to pay max amount that we would spend on a good. Slide 13 Marginal Analysis Tool used to answer questions of how much?, by examining very small changes. Benefits > Cost => Do more Benefits Do less Slide 14 WTP for Paper stacks Quantity of paper stacks. p1 p2 q1q2 Slide 15 WTP for Paper stacks Quantity of paper stacks p1 p2 q1q2 Slide 16 The benefit lost when specific environmental services are forgone in the conversion to the new use Slide 17 Price of Paper Stacks Quantity of Paper Stacks p2 q1q2 p1 Slide 18 Price of Paper Stacks Quantity of Paper Stacks p2 q1q2 p1 Slide 19 Price of Paper Stacks Quantity of Paper Stacks p1 p2 q1q2q1q2 Slide 20 Price of Paper Stacks Quantity of Paper Stacks p1 p2 q1q2q1q2 Slide 21 Price of Paper Stacks Quantity of Paper Stacks Marginal Cost Marginal Benefit Equilibrium Price Equilibrium Quantity Slide 22 First Equimarginal Principle Net benefits are maximized when the marginal benefits from an allocation equal the marginal costs Efficient Max. Net Benefits Slide 23 One convenient way to express WTP between price and quantity is through the inverse demand function. In an inverse demand function, the price consumers are willing to pay is expressed as a function of the quantity available for sale. Suppose the inverse demand function of a product is P=80-q And the marginal cost of producing the product is MC=1q A) How much would be supplied in a static efficient allocation? B) What would be the magnitude of the net benefits? Slide 24 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 PV[B0, B1, B2]= B0/(1+r) 4 + B1/(1+r) 3 +B2/(1+r) 2 Slide 25 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 26 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 Transferbility 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) Slide 27 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 28 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 29 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 30 Price of Good Quantity of Good Supply Demand Equilibrium Price Equilibrium Quantity Slide 31 Homework #1 due