Final Flashcards
Bay’s value
$678 billion in 1989
equivalent to ~ $1.15 trillion today
Value of cleaning the Bay and it’s rivers and streams
create $22 billion/year in net benefits
The “invisible hand”
Adam Smith (The wealth of nations, 1776) -a competitive market (with many buyers and sellers and no government interference) made up of individuals acting in their own self interest will result in an outcome that is most beneficial to society and the public good as a whole
Economic value
must be valued either directly or indirectly by humans
- measured in terms of tradeoffs - what is the maximum one would be willing to give up (willingness-to-pay) : money; time; other goods
- Net value
Net value
total value less what is foregone to obtain it
Willingness-to-pay
the maximum one would be willing to give up
Willingness-to-pay
maximum Trade-off: barter time Money -constrained by income or wealth: can't be willing-to-pay more than you have available
Willingness-to-accept
the minimum amount you would be willing-to-accept to forego or sell something
- not constrained by income or wealth
- in many cases, can use willingness-to-accept to approximate willingness-to-pay
Net value
total value or maximum willingness-to-pay (minus) what one actually has to pay
Supply currve
slopes upward
: on the margin (the next additional unit), is more expensive to produce more
-everyone is already producing at their lowest cost (economies of scale have already been attained)
-to produce more, need to bring more costly inputs into production
-this is true at the individual farm level as well as the industry as a whole
Total revenue
price times quantity
: adding up the marginal revenues
Marginal costs
the total cost of production (under the curve)
Producer surplus
the area above the curve
: money measure of the Net Economic Benefit to producers from a given level of production taking all costs into account
market supply
producer A’s supply + producer B’s supply = market supply
Shifts in the supply curve
due to changes in technology, number of producers, input prices etc.
- decrease in supply shifts curve left
- increase in supply shifts curve right
Consumer curve
downward sloping
Consumer surplus
total willingness to pay - cost
Total willingness to pay
add up the marginal willingness-to pay
Total cost
add up the marginal costs to consumers
Consumer surplus
total willingness to pay - cost
Shifts in demand curve
due to changes in income, tastes, number of buyers, prices of related goods, etc.
- increase in demand shifts curve to right
- decrease in demand shifts curve to left
How do we know this market outcome is the best
competitive equilibrium maximizes consumer and producer surpluses
Pareto Efficient
no way to make any person better off without hurting anybody else
Pareto efficient amount of output
Q* the price that someone is willing to pay to buy an extra unit of the good is equal to the price somebody must be paid to sell an extra unit of the good
Calculating producer surplus
1/2 b h
Externality
the impact of one person’s actions on the well-being of a bystander
result of externality
including some of the harm from the pollution externality into the market resulted in
- less being produced
- at a higher cost
- consumers are always worse off
- producers are usually worse off unless price goes up a ton
Economic definition of value
Willingness-to-pay
Producer and consumer surplus
Pareto improvement
a change in conditions (policy, allocation of resources, etc.) that leaves some individuals or groups better off and all other individual or groups at least as well off as they were before the change
-win-win
Pareto efficient
no additional change can be made that is a Pareto improvement
Kaldor-hicks Compensation principle
some groups (individuals) are made worse off (losers) and some are made better off (winners)
-but the amount that the winners gain is more than the amount the losers lose. The winners could compensate the losers
: the decision on whether or not to actually use gains to compensate the losers is a political decision, not an economic decision
policy outcomes
every pareto improvement is a Kaldor-hicks improvement
-most kaldor-hicks improvements are not pareto improvements
Under KH criterion a more efficient outcome can in fact leave some people worse off
Corollary
there may be some level of restoration below the ideal restored Bay, that might be worth it from an individual or societal perspective
The problem of applying benefit-cost analysis to chesapeake bay issues
many of the economic benefits related to the environment are difficult to measure
-recreation
-aesthetics
-preserving an ecosystem
: if they are difficult to measure, and thus, not included in the benefit-cost analysis, the results of the analysis will be flawed and biased against environmental improvements
what do we value about the Chesapeake Bay?
seafood -commercial fishing -processing industry -Seafood restaurants, retail -consumers Recreation -fishing, crabbing -boating -swimming -beach use other -waterfront/waterview: home, restaurant, hotel, park
Use value
can observe behavior or choices made under different scenarios
- market value
- non-market value
Market value
price and quantity data available to measure demand curve
non-market value
can observe choice behavior, but not prices
Non-use or passive use value
nothing to observe directly related to what is being valued
Passive use values
existence value
altruistic value
bequest value
option value
Existence value
Person’s willingness to pay to preserve a resource for which he has no current or future plans for personal use
Altruistic value
willingness-to-pay to preserve someone else’s use value
Bequest value
willingness-to-pay for use value for future gnerations
Option value
willingness-to-pay opportunity to use resource in the future
Governance
structure and principles which constitute the framework for which policies are set and within which individual management decisions are made
Renewable resource
fish are renewable
: the amount of fish by weight or number - replaces itself
-smaller fish get bigger
-reproduction
Rate of replacement
depends on the stock size (weight or numbers of fish) at any given time
why are fish renewable resource
energy is being added to the system: solar energy –> algae –> fish
carrying capacity
on average, the maximum amount of a species that can be supported on a continuing basis under current ecosystem conditions (habitat, food, predators)
Sustainable harvest
harvest only the amount that the fish stock was growing that year will keep the fish stock at the same level year after year
- harvesting less that the annual growth allows the fish stock to get bigger in the next period
- harvesting more than the annual growth makes the fish stock smaller the next period
- harvesting exactly the amount of annual growth keeps the fish tock at the same level year after year (sustainable)
low and high stock sizes can support the same level of sustainable harvests, but at very different costs
Maximum sustainable yield
maximum sustainable harvest
Biological Overfishing
a rate or level of fishing mortality that jeopardizes the capacity of a fishery to produce the maximum sustainable yield on a continuing basis
Magnuson-Stevens Fishery Conservation and management Act prohibits overfishing
federal law (doesn't apply to most Chesapeake bay fisheries- managed by the states) \: state fisheries are managed to prevent overfishing
resource rent
the difference between the price of the resource (marginal value) and the cost to harvest (marginal cost)
Open access fishery
the fishery is capable of producing positive economic rent: however, under open-access, the resource produces zero rent because excessive level of fishing effort is being utilized
open access
if EEOA total costs of fishing would exceed the total revenues, some fishermen would lose money and withdraw from the fishery, reducing the level of effort E
The Strange Case of the Fishery Supply Curve
regular supply curve slopes upward, the more produced the greater the cost of production for the next unit (increasing marginal costs)
- more inputs used = greater cost = more produced
- beyond the maximum, costs keep going up and harvest (production) starts going down
Why do fishermen keep fishing if the catch is going down?
In a fishery, the more produced (harvested), the smaller the remaining stock, and thus, the greater the cost of production per additional unit harvested.
-the additional cost from reducing the stock is external to the individual fishermen’s fishing decision, it is shared by all the other fishermen (EXTERNALITY)
Property rights
the fish are “common property”, no one owns them. No one charges the fishermen to use them. The market fails
Why don’t the fishermen stop fishing at a level with Positive rents?
More fishermen enter the fishery, increasing everyone’s harvest cost
- Existing fishermen get in a race to catch as much of the quota as possible : buy bigger boats, burn more fuel, hire more crew, fish on bad weather days (risk lives)
- costs increase until at the margin they equal price