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by: Gwen Rosenbaum

EnvironmentalEconomics ECON231

Marketplace > Oberlin College > Economcs > ECON231 > EnvironmentalEconomics
Gwen Rosenbaum

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This 10 page Class Notes was uploaded by Gwen Rosenbaum on Monday October 19, 2015. The Class Notes belongs to ECON231 at Oberlin College taught by Staff in Fall. Since its upload, it has received 43 views. For similar materials see /class/224395/econ231-oberlin-college in Economcs at Oberlin College.


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Date Created: 10/19/15
Prof Gaudin 7 Environmental Economics 7 Technical notes Public goods Goods can be classi ed according to their degree of excludability and subtractibility All goods are not pure public goods or pure private goods Subtractibility 1 Rival 1 LOW HIGH DIFFICULT Public goods Common Property Excludability Resources Toll goods EASY Private oods or Club goods g Pure public goods have 2 characteristics that separate them from private good 0 They are non excludable it is dif cult to exclude anybody from using them 0 They are non rival no substractibility One person using the good does not reduce other peoples enjoyment of the good Which implies that the marginal cost of one more person enjoying the use of the good is zero Most public goods may have a some degree of subtractibility and there could be ways to exclude people But the cost of excluding is usually very high compared to the MC of use Examples of public goods are numerous Defense and security parks infrastructure air basic research Pure public goods are extreme examples of positive externalities because there is no marginal cost of having more people to enjoy the good Society s demands for public goods are found by vertically summing all individual demand curves Note that this is quite different from private goods for which market demand was found by adding the quantities demanded at each price ie by horizontally summing individuals demand curves Why Since each person will be able to consume the same quantity of the public good without reducing other s possibilities we should add up each person s willingness to pay to get total demand The ef cient amount of public good to be provided is determined given the marginal cost of producing the public good and the marginal bene t to the people the sum of each individual s marginal bene ts Example Suppose we have two individuals with the following demand for a park in terms of acres P120010Q MBl P210010Q MBZ Prof Gaudin 7 Environmental Economics 7 Technical notes Suppose MC is 150 per acre and constant To nd the MBsociety we add up each individual s willingness to pay Careful with only two individuals the total demand will have a kink since only individual 1 will ever want more than 10 acres of park The easiest is to graph it P A MBsoc1ety 30 DWL of private provision to individual 1 20 MC 100 MB1 MR 0 acres Q1 Qquot Q What is the efficient number of acres for the park For Qlt10 MBsocietyMB1MB230020Q MC150 MCMB1MB2 3 30020Q150 3 Q15020 75 acres Q Check if less than 10 I Why is a public good quot J by the private sector If PMC of production competitive market gt lowest possible private provision price assuming that individuals would reveal their demand individual 1 would demand 15020010Q 3Q50105 Individual 2 would not be willing to oay the 150 per acre for ANY size park since 15010010Q 3Q must be negative Therefore if the good were to be supplied in the market only individual 1 would pay Individual 2 would take advantage of whatever size park without paying since she cannot be excludedIn this case only 5 acres would be reserved for the park causing a dead weight loss 7 See graph It gets worse Often public goods have large costs associated with them so no single individual is willing to pay enough to have the good provided Even if one entity would be willing to pay the cost for some positive amount knowing that they could take advantage of a park that others pay for they would not be willing to pay I Here individual 1 may not even want to pay the 150 Especially if there is imperfect information and she cannot tell whether someone else is willing to pay for the park Since there is no way to exclude people from using the public good and more individuals can enjoy the public good at no extra cost if there is no congestion most people would rather be m Prof Gaudin 7 Environmental Economics 7 Technical notes riders and not pay at all In this case the park will not be preserved at all leading to an even larger dead weight loss Because of this even though public goods have very high social bene ts associated with them no private rm could receive enough payment for it and no individual is willing to reveal their willingness to pay so public goods are either not supplied or at best undersupplied by markets The government as opposed to private rms can at least charge people through taxes This is why public goods are generally provided by governments or nonpro t organizations who generate their revenue from other sources than the sale of the good ex taxes charitable contributions Theoretically the government should produce the optimal amount Q charge a total of PMC and ideally charge every person their MB Then each person would pay 1 MB1gtltQ 2 MB2gtltQ And the total cost of Q would be covered However this assumes that we know exactly all individuals preferences something that is very unrealistic given that THERE IS NO INCENTIVE FOR PEOPLE TO REVEAL THEM freerider problem Thus the optimal approach of Marginal Benefit Taxation does not work in practice Julian Simon39s Bet With Paul Ehrlich Page 1 of 5 Julian Simon39s Bet With Paul Ehrlich By Brian Carnell In 1980 economist Juian Simon and biologist Paul Ehrlich decided to put their money where their predictions were Ehrlich had been predicting massive shortages in various natural resources for decades while Simon claimed natural resources were infinite Simon offered Ehrlich a bet centered on the market price of metals Ehrlich would pick a quantity of any five metals he liked worth 1000 in 1980 If the 1990 price of the metals after adjusting for inflation was more than 1000 ie the metals became more scarce Ehrlich would win If however the value of the metals after inflation was less than 1000 ie the metals became less scare Simon would win The loser would mail the winner a check for the change in price Ehrlich agreed to the bet and chose copper chrome nickel tin and tungsten By 1990 all five metal were below their inflation adjusted price level in 1980 Ehrlich lost the bet and sent Simon a check for 57607 Prices of the metals chosen by Ehrlich fell so much that Simon would have won the bet even if the prices hadn39t been adjusted for inflation 1 Here39s how each of the metals performed from 1980 1990 Metal 2 1980 1990 Percentage price price change 1980 1980 dollars dollars Copper 200 163 185 o 19556 lbs Chrome 200 120 40 o 5128 lbs Nickel 200 193 35 6352 lbs Tin 200 56 72 o 2291 lbs Tungsten 200 86 57 o 1364 lbs Ehrlich39s reaction to the outcome was typical of his habit of ignoring his failed predictions in general Ehrlich maintained he really didn39t want to make the bet and regardless that the outcome was meaningless Paul Ehrlich and other scientists knew that the five metals in the proposed wagers were not critical indicators and said so at the time Nonetheless after consulting with many colleagues Paul accepted Simon39s challenge rather than listen to him fileCDocuments and SettingssgaudinMy DocumentsWWSimonsbetht 992002 Julian Simon39s Bet With Paul Ehrlich Page 2 of 5 charge that environmental scientists were unwilling to put their money where their mouths were 3 Unfortunately this claim doesn39t match the record very well First Simon got the inspiration to offer the bet from Ehrlich who famously wrote that quotIf I were a gambler I would take even money that England will not exist in the year 2000quot 4 The many people who have taken Simon to task for assigning to much importance to his bet with Ehrlich seem to ignore Ehrlich39s penchant for such wild statements More importantly in 19805 Ehrlich not only thought his bet was easy money but thought Simon to be dead wrong in thinking metal prices would go anywhere but upward Simon is wrong about the economics of mineral resources The troug h like pattern long predicted for mineral resources prices has now shown up as Cook 1976 points out for all industrial metals except lead and aluminum This includes copper I and my colleagues John P Holdren and John Harte jointly accept Simon39s astonishing offer before other greedy people jump in 5 Ehrlich hardly sounded like a man taking Simon39s bet just to make him shut up Similarly Ehrlich recently claimed the prices of the metals fell not due to declining scarcity but quotin part because a recession in the first half of that decade the 19905 slowed the growth of demand for industrial metals worldwidequot 6 There were in fact a number of reasons for the declined in metal prices in the 19805 The decline in tin prices was staggering for example but is explained by the fact that in 1980 most of the world39s tin production was controlled by a cartel which artificially kept prices inflated The cartel fell apart in the 19805 and the price of tin crashed The complaint that bet doesn39t prove much because use of metals declined makes Simons39 point As New York Times Magazine writer John Tierney summed up changes in the use of metals in the 19805 Prices fell for the same Cornucopian reasons they had fallen in previous decades entrepreneurship and continuing technological improvements Prospectors found new lodes such as the nickel minds around the world that ended a Canadian company39s near monopoly of the market Thanks to computers new machines and new chemical processes there were more efficient ways to extract and refine the ores for chrome and the other metals For many uses the metals were replaced by cheaper materials notably plastics which became less expensive Telephone calls went through satellites and fiber optic lines instead of copper wires Ceramics replaced tungsten in cutting tools Cans were made of aluminum instead of tin 7 A5 Ehrlich told Tierney however he believes there39s no lesson to be learned from his bet with Simon The bet doesn39t mean anything Julian Simon is like the guy who jumps off the Empire State Building and says how great things are going so far as he passes the 10th floor I think the price of those metals will go up eventually 8 For Ehrlich if his predictions come true they prove he39s right and if they don39t come true they still prove he39s rig ht or he takes credit himself for averting the predicted disaster Both Simon and Ehrlich offered new criteria for a second bet but were unable to agree on any terms before Simon39s death in 1997 Simon originally offered to repeat the original bet but fileCDocuments and SettingssgaudinMy DocumentsWWSimonsbetht 992002 Julian Simon39s Bet With Paul Ehrlich Page 3 of 5 Ehrlich despite his insistence that quotthose metals will go up eventuallyquot declined In The Ultimate Resource 2 Simon offered this blanket wager offer I39ll bet that just about any environmental and economic trend pertaining to basic human material welfare though not of course the progress of this group compared to that one will show improvement in the long run 9 For their part Paul Ehrlich and Steven Schneider offered a series of 15 items quotpertaining to material human welfarequot they were willing to bet would worsen over the next decade Simon declined to accept the wager The criteria included 0 The three years 20022004 will on average be warmer than 19921994 Rapid climate change associated with global warming could pose a major threat of increasing droughts and floods 0 There will be more carbon dioxide in the atmosphere in 2004 than in 1994 Carbon dioxide is the most important greenhouse gas driving global warming 0 There will be more nitrous oxide in the atmosphere in 2004 than 1994 Nitrous oxide is another greenhouse gas that is increasing due to human disruption of the nitrogen cycle 0 The concentration of ozone in the lower atmosphere the troposphere will be greater than in 1994 Trophospheric ozone is a component of smog that has important deleterious effects on human health and crop production 0 Emissions of the air pollutant sulfur dioxide in Asia will be significantly greater in 2004 than in 1994 Sulfur dioxide in the atmosphere becomes sulfuric acid the principal component of acid rain and it is associated with direct damage to human health forests and crops 0 There will be less fertile cropland per person in 2004 than in 1994 Much of Earth39s best farmland is paved over but even if it weren39t population will reduce percapita acreage 0 There will be less agricultural soil per person in 2004 than 1994 Erosion virtually everywhere far exceeds rates of soil generation 0 There will be on average less rice and wheat grown per person in 20022004 than in 19921994 Rice and wheat are the two most important crops consumed by people 0 In developing nations there will be less firewood available per person in 2004 than in 1994 More than a billion people today depend on fuelwood to meet their energy needs 0 The remaining area of virgin tropical moist forests will be significantly smaller in 2004 than in 1994 Those forests are the repositories of some of humanity39s most precious living resources including the basis for many modern pharmaceuticals worldwide 0 The oceanic fisheries harvest per person will continue its downward trend and thus in 2004 will be smaller than in 1994 Overfishing ocean pollution and coastal wetlands will continue to take their toll 0 There will be fewer plant and animal species sti extant in 2004 than in 1994 Other organisms are the working parts of humanity39s lifesupport systems 0 More people will die of AIDS in 2004 than in 1994 as the disease takes its toll of already infected individuals continues to spread in Africa and takes off in Asia 0 Between 1994 and 2004 sperm counts of human males will continue to decline and reproductive disorders will continue to increase Over the past fifty years sperm counts worldwide may have declined by as much as 40 percent Paul and Steve bet this trend will continue due to the widespread use and environmental persistence of ormonedisrupting synthetic organic chemical compoun s fileCDocuments and SettingssgaudinMy DocumentsWWSimonsbetht 992002 Julian Simon39s Bet With Paul Ehrlich Page 4 of 5 o The gap in wealth between the richest 10 of humanity and the poorest 10 will be greater in 2004 than in 1994 10 The items offered by Ehrlich and Schneider dramatically highlight the different approach between them and Simon The first five items for example don39t even pretend to measure human welfare Simon wants to bet on things like human life expectancy while Ehrlich and Schneider respond that they want to bet on the composition of the atmosphere Some of their suggestion are even odder The proposed bet on income inequality for example seems strange Income inequality between the top 10 percent and the bottom 10 will be much higher on Jan 1 2000 than it was on Jan 1 1900 yet by every measure the bottom 10 is much better off today than 100 years ago Ehrlich and Schneider apparently believe this improvement is not as important as achieving more equal income distribution Similarly the claim that sperm counts have declined worldwide is specious and relies on data that is highly controversial Recent studies claiming that sperm rates in the United States had declined were found to be flawed because they were comparing different geographical regions and for reasons still unknown sperm counts vary by region contrary to what one would expect if Ehrlich39s fear of chemicals were accurate sperm counts are actually higher in urban areas than in rural areas in the United States Simon illustrated the difference with an analogy involving the Olympics Let me characterize their Ehrlich and Schneider39s offer as follows I predict and this is for real that the average performances in the next Olympics will be better than those in the last Olympics On average the performances have gotten better Olympics to Olympics for a variety of reasons What Ehrlich and others says is that they don39t want to bet on athletic performances they want to bet on the conditions of the track or the weather or the officials or any other such indirect measure 11 Simon said he was willing to bet on the items in Ehrlich and Schneider39s proposal that directly measures human welfare such as the per capita rice and wheat crops but that Ehrlich and Schneider insisted on betting on all fifteen propositions as a package deal 12 Footnotes 1 Bast Joseph L Hill Peter J and Rue Richard C Eco sanity a common sense guide to environmentalism Laham Maryland Madison Books 1994 p124 2 Tierney John quotBetting the planetquot New York Times Magazine Dec 2 1990 p81 3 Ehrlich Paul R and Ehrlich Anne H Betrayal of science and reason how anti environmental rhetoric threatens our future Washington DC Island Press 1996 pp100 1 4 Simon Julian The ultimate resource New Jersey Princeton University Press 1981 p27 5 Ehrlich Paul R quotAn economist in wonderlandquot Social Science Quarterly vol 62 no 1 March 1981 p46 6 Ehrlich Paul R and Ehrlich Anne H Betrayal of science and reason how anti environmental rhetoric threatens our future Washington DC Island Press 1996 p101 7 Tierney John quotBetting the planetquot New York Times Magazine Dec 2 1990 p81 fileCDocuments and SettingssgaudinMy DocumentsWWSimonsbetht 992002 Julian Simon39s Bet Mth Paul Ehrlich a nerney1ann Bettmg the p anet New Vurk Tnnes Magazme Dee 2 1999 p 91 9 Swan Juhan The ummate resnurce 2 Fwy22mm New Jersey Fwy22mm Unwersny Press 1995 p 35 19 Enrnen 9am R and Enrnen Anne H B21raya ufsmence and reasan new antkenwmnmenta rhetnru threatens Bur future Washmgtun DC 1s1anu Pr2551995PP 1911 11 M1e1e Frank meg wnnaut hrmts an mterwew wnn Juhan Swan Skeptm vu 5 na 1 1997 p 57 12 M1e1e Frank meg wnnauunnns an1nterwewwnn19nan Swan Skeptm vu 5 na 1 1997 p 57 Lax Modrfred Eaturdayr November 24 2001 imnn he 11 992002 Prof Gaudin 7 Environmental Economics 7 Technical notes CPR p l Externalities and market failure The Case of Common PropertyOpen Access Resources Note this is just a primer we will do more in class Common propertyOpen access resources such as groundwater aquifers lakes oceans some grazing land etc are accessible to anyone and belong to no one in particular However they can be exploited The harvest becomes the property of the harvester and can be sold on the market for a positive price Negative externalities occur in the case of common property resources because individuals harvesting the common property resource do not take into account the impact of their level of activity on the resource and on other harvesters costs Static 39 e temalitv each 39 J39 39J 39 harvesting the resource imposes a cost on all other harvester by depleting the resource As the resource becomes scarcer the cost of harvesting increases for all But this cost is not taken into account since it depends on the total amount harvested which is not under the individual harvester s control Dynamic intertemporal externality in open access renewable resources such as fish The amount of sh next year depends on the amount of sh left over this year to reproduce Small individual harvesters do not take into account this cost since it depends on the total sum of the harvests and not on their individual harvest These externalities can be analyzed as in B with a MPC calculated by adding up all the private MC of harvesting understating the MSC The Marginal Benefit curve in that case is often assumed constant as the harvest from a particular common property resource may be assumed to have no impact on the market price for the harvested good Graph A below The common property externality is sometimes analyzed at the level of the harvester say a fisherman for ex working for his own consumption in which case the market price of the fish is irrelevant The marginal benefit MB to the fisherman decreases as the number of fish caught increases diminishing marginal utility Assume for simplicity that the marginal cost is constant Instead of the MPC being understated for each fisherman we may consider that it is the marginal benefit perceived by the fisherman that overstates the marginal benefit to society The social marginal benefit MSB generated by the amount of fish caught is less than the marginal benefit perceived by the fisherman because of the negative externality he imposes on other fishermen and the value of the resource Graph B Graph A Graph B MPC MPBMSB MPCMSC MSB MPB QS Qp QS QP PD This explains why common property resources tend to be overeXploited and depleting too fast Prof Gaudin 7 Environmental Economics 7 Technical notes CPR p 2 Common property resource problem are often presented in game theoretical frameworks Thin about the following example Hog Bath is a small pond teeming with fish The estimated number of sh is 2000 There are two shermen Gary and Carlos with access to this pond Each of them can catch either 0 or 1000 sh this year Any sh not caught will multiply at a 50 growth rate until next year ie any 2 fish not caught becomes 3 next year After next year alas Hog Bath will be lled with dirt due to the highway construction project Thus Gary and Carlos will split the remaining sh equally next year There is no limit on how much each can catch in the second year For both Gary and Carlos a sh next year is just as good as a sh this year so that the payoff to each person is the total number of sh in the two year period The above situation can be best thought of as a game in which each of the two shermen chooses the number of sh he will catch this year a Payoff matrix Fill with the appropriate payoffs for each situation Carlos 0 1000 Gary 0 a a 1000 b Find the Nash Equilibrium for how many sh will each sherman catch in the Nash equilibrium Explain your answer A Nash Equilibrium is a situation where players in a game have no incentive to change their choice after they see what other players have chosen c If Gary was given the exclusive property right to the pond what will be the number of catches this year Explain d Can you think of how Carlos and Gary can change the rules of the game so that the Nash equilibrium of the new game is also the social optimum


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