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Date Created: 03/02/16
NREM 203 – Exam 2 Study Guide Cost Benefit Analysis 1. List all costs and benefits in relation to a proposed action o 2. Obtain reliable estimates for those costs and benefits generally measured in monetary terms 3. Use nonmarket valuation techniques to determine the rest 4. Add up all costs and benefits, under a range of assumptions and scenarios 5. Compare total costs to total benefits to obtain a recommendation EX. The federal government must make a decision about the appropriate level of mercury emissions from power plants. Compared a baseline conditions, a stricter standard would cost $10 billion per year but prevent an estimated 1,000 premature deaths. The benefits in terms of productive work hours and minimized health care costs is $12 billion. What should the government do? Expression of cost-benefit analysis 1. Net benefits = total benefits - costs (2 billion) 2. Benefit/cost ratio (1.2) great than 1 is good less is bad Considerations Seek to maximize net benefits Bottom-line net benefit does not reveal distribution of costs and benefits Some benefits occur in the future o Utilize discount rate to determine present value o Risk and uncertainty regarding outcomes o Employment of the precautionary principle If there is the potential risk for excessive harm the project maybe shouldn’t go through Valuation of human life o Economists seek to determine the value of a statistical life (VSL) Risk: applies to situations where we do not know the outcome of a given situation but can accurately measure the odds Uncertainty: applies to situations where we cannot know all the information we need in order to set accurate odds in the first place Externality: a side effect or consequence of a market transaction that affects someone other than the participants Ex. People buy cars that pollute the air without considering the effect it has on other people. They only pay the private cost that effects them rather than the external cost and private cost which is totaled as the social cost Internalize negative externalities: users should pay the full social cost of act Apply an upstream tax: tax is administered as high up as possible so the amount trickles down to the consumer Internalize positive externalities: positive externalities are never fully recovered Subsidies allow some reward for creating positive externalities Effectively lowers the cost of production Encourages socially beneficial acts Optimal Pollution: pollution level that maximizes the net social benefits society's welfare has been maximized with respect to environmental quality Marginal net benefit - the difference between the value to the consumer and the cost of supply for each unit of a product Discount Rate – the minimum interest rate set by the Federal Reserve It is used to calculate the marginal net benefit that can be earned in the future. When future generations have a larger benefit of a good or resource in the future than the current generation it is important to preserve that resource for later use. The larger the discount rate the large amount of resources will be preserved future generations. Hartwick's rule - the proceeds from resources sales should be invested, not consumed Rather than leaving resources for future generations, we replace them with an equal value of produced capital Green Economy One that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities. One which is low carbon, resource efficient and socially inclusive. Growth in income and employment is driven by public and private investments that reduce carbon emissions and pollution, enhance energy and resource efficiency and prevent the loss of biodiversity and ecosystem services. Kuznets Curve Environmental impacts increases with increased wealth however, eventually it tappers off and begins to decrease Graphs the hypothesis that as an economy develops, market forces first increase and then decrease economic inequality The Porter hypothesis Traditional Economic Theory Firms minimize costs to remain competitive Compliance costs make firms uncompetitive Porter hypothesis Key to competitiveness lies in ability to continually innovate Environmental regulations provide impetus for innovation with net positive outcomes Even where net effect of regulation is negative, innovation can reduce compliance costs Benefit-cost ratio of environmental regulations ranges from 2.8:1 through 23:1 Decoupling: breaking the correlation between increased economic activity and similar increases in environmental impacts. Relative decoupling: growth rate of negative environmental impact is positive, but less than economic growth rate Absolute decoupling: the level of the negative environment mental impact is stable or decreasing, while the economy continues to rise. Common Property – non-exclusive but rival because when they run out they are gone, congested highway, fish in the ocean, natural resources No one maintains them and they eventually run out Public goods – represent the demand side problem. They are non-rival and non-excludable. The government provides and maintains them, education, public parks Managing public goods Available to everyone Nonexclusive and non-rival No individual has an incentive to pay for something that everyone else can enjoy freely Privatization Charging a price provides benefits to buyers and excludes nonbuyers Changes the inherent nature of the good Reliance on Donations Generally not sufficient for complete and efficient provision of public goods Enables free riders Government intervention Level of favor varies among citizens Decision must be made All citizens pay share through taxes Open-access resource: no regulations are put in place, people can use it as much as they want Ex. High seas for fishing Traditional economic theory Free entry and profit maximization promote economic efficiency Opposite effect in a common pool resource Encourage over harvest Eliminate profitability Destroy the resource Economic explanation Underpriced resources are overused Solutions Voluntary limits - individual economic incentives may cause agreement to break down New fishers attracted by incentives are not bound by agreement License fee - removes incentive for additional boats above the optimum, an further boats would be unprofitable Competition protects the ecosystem rather than destroying it Quotas - catch limits Individual transferable quotas allow fishers to buy and sell their shares Tragedy of the commons: Without private property rights, no one is obligated to take care of it and it suffers, it gets overused Copiers in an office, dishes in a shared home, green space in a city square Free rider: Someone who reaps the benefits of something without contributing Property Rights are the right to Use something Exclude others from using it Sell, rent, or lease it Coase Theorem says the social benefit and physical outcome is the same no matter who has the right. No matter who has the right, the parties will negotiate to the equilibrium. The Covanta Waste Management Deal Limits government involvement in recycling issues Limits new business types in Indianapolis May increase recycling and decreases taxes in Indianapolis SB 109 – “Canned Hunting” Adds regulations to something that is already happening anyways Is it ethical to shot something that doesn’t have a chance of escape? HB 1082 – “No More Stringent Than” Provides an incentive for states to work with the federal government Doesn’t let states or cities make laws about anything that the federal government does regulate The state or city won’t be required to tell about water quality issues for 2 years SB 366 – Solid Waste Management Opt-Out Allows counties to dissolve solid waste management May limit the regulations on air and water quality Private sector may step in and provide more services that the local government could
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