This is the max you'd be willing to pay for each seat.
Takeway: The optimal ticket is not the "best" seat, or even the best ticked you can afford
The 2017 Toyota Camry available in two versions:
Conventional: 26 MPG ; Hybrid: 41 MPG
Which car is more efficient?
Conventional model costs $23,000
Hybrid costs $28,000
Cost to own = Up front cost + Cost to drive
Cost to drive = Price of gas * Miles / MPG
If gas is $3, hybrid saves money if:
Miles *3 * (1/26 - 1/41) > $5000
Or you plan to drive more than 147,000 miles!
PM is the mixture of dust, soot and droplets in the air
Emitted directly from construction or smokestacks
Also forms indirectly in atmosphere
Estimated to cause ~ 25% of lung cancer deaths, 8% of COPD deaths, and about 15% of ischaemic heart disease and stroke.
Given this, how much PM pollution should we allow?
Plot the social cost of PM against the level of PM pollution.
Increasing marginal harm from pollution
Imagine a starting point of no PM regulation
Consider a continuum of measures that would reduce PM pollution
What does the graph of total benefits from each policy level look like?
Decreasing marginal benefits from PM reductions
Reducing pollution involves real economic costs.
Plot these policy costs against increasing policy stringency (cleaner air)
Increasing marginal costs
Policy which reduces PM entails both benefits and costs.
What level of air quality (PM reductions) maximizes welfare?
Plot total benefits and total costs against policy stringency
Efficient pollution control maximizes net benefits
We know we want to maximized the difference between total benefits and total costs
How do we actually find this point in practice?
A demand curve is a schedule of the marginal consumer's reservation price
A supply curve is a schedule of the cost of producing the marginal unit
The same concepts apply to the benefits (demand) and costs (supply)of pollution control.
Environmental protection characterized by increasing marginal costs and declining marginal benefits
Efficient level sets MB = MC
This implies that the optimal amount of pollution is probably not zero (or unlimited)
Costs may be incurred this year, benefits in the future (typical investment) or benefits this year, costs in the future (loan)
How does the equimarginal principle apply in this situation?
Can we compare benefits today to costs in the future (or vice versa)?
Question: Would you prefer to receive $10K today or $10K one year from now?
[Ignore inflation and uncertainty about payment]
How about $10K today or $20K next year?
How about $10K today or $15K next year, etc…..?
That number () is your consumption rate of interest, your “personal” discount rate
Why is your > 0?
The future value of money invested presently at the rate, , for years:
To get the present value of some future payment years from now:
Net Present Value is the present value of benefits minus the present value of costs.
Efficient environmental policy equates the present value of marginal costs with the present value of marginal benefits.
Let's say you plan to drive your car 200,000 miles.
Total gas expenditure:
Hybrid saves $6,794 which is more than the $5,000 up front cost difference.
Assume you plan to drive 40K miles per year for 5 years.
Gas bill in each year
Can calculate the present discounted value of this expenditure flow:
Assume prices already in real dollars (net of inflation)
Small differences in can have a big effect on net benefits
What about the government?
Will return to this when we discuss climate change
Next up: How do we calculate MB and MC?