Key points from each module.
- Econ is the study of how to efficiently use scarce resources. Scarcity implies that we must make tradeoffs.
- Markets are capable of of efficiently allocating private resources in incredibly complex systems. But when it comes to the environment, free markets are not efficient.
- Review difference between net and gross benefits. Economic efficiency maximizes net benefits.
- Be able to relate total and marginal benefits and costs (equimarginal principle). Know the shape of these curves and the intution behind it.
- Under conditions of perfect competition, perfect information, and no externalities, markets will maximize net benefits. Be able to identify market outcomes and welfare loss when these conditions are not met.
- When benefits and costs span time, we need to put them in present value terms in order to compute net benefits.
- You should be comfortable using the PV formula, translating benefits and costs occurring at different times into comparable units.
- Coase provided a seminal challenge to the idea that externalities necessarily imply markets won't work.
- In the end, ended up illuminating more clearly the critical role of property rights and transaction costs in markets.
- Know how to find a Coasean equilibrium under these assumptions.
- How to place a value on environmental benefits? Concept is same as in micro (WTP). Challenge is that we don't see prices.
- Stated preference methods instead try to recover WTP from highly structured surveys. Know the pros and cons.
- Revealed preference methods try to infer what people would pay from their actions (ie travel cost method, averting expenditure).
- Value of Statistical Life
- Engineering vs opportunity costs
- Statutory vs economic incidence
- Net vs gross job losses, and long vs short run employment effects
- Generally speaking, jobs are a "cost" not a "benefit"
- Kaldor-Hicks vs Pareto
- Review evidence of correlation between pollution, race and poverty.
- Case study -- Mercury
- Common mistakes and misapplications of BCA
Pubic Goods and the Tragedy of the Commons
- Taxonomy of goods
- Incentives to under supply public goods
- Tragedy of the Commons
Climate Change - International Cooperation
- Public good problem
- History of international climate negotiations -- from top down to bottom up
Managing Renewable Resources
- Basic economics of a fishery
- Maximum sustainable yield vs efficient yield
- Free entry condition and response to regulation
- Example from US halibut fishing
- Exhaustible resources rarely exhausted
- But fact that they are not replaceable imposes an intertemporal externality.
- The Hotelling Rule describes the optimal extraction path in light of this.
- Understand when the market extraction path will and won't be optimal.
- Economic concept of sustainability
- What is and isn't captured in GDP
- Hartwick Rule
- Alternative measures across countries
Market Based Policies and Cost-Effectiveness
- Cost effectiveness provides a more modest goal for policy design. Know what it is, compared to efficiency, and what the properties of a cost-effective outcome are.
- Command and control policies are unlikely to be cost-effective. Be able to explain why.
- Taxes achieve cost-effectiveness by construction. Understand how they work and why they are cost-effective.
- An alternative approach is to define a property right over the pollutant and allow polluters to trade.
The Social Cost of Carbon
- An efficient carbon tax would be set equal to the marginal external damages.
- Computing this number involves simultaneously modeling carbon emissions, the climate impacts, the physical and biological response and the economics impacts, over the course of centuries...
- In 2009 the US IAWG undertook an important first step in calculating the SCC
Lessons from the Acid Rain Program
- History and original motivation
- Ex post evaluation
- Legacy and lessons as discussed in reading
- With no uncertainty, a tax is equivalent to an equally stringent cap-and-trade program
- In a seminal paper, Marty Weitzman demonstrated that the two are not equivalent if costs are uncertain, but are equivalent if only benefits are uncertain.
- The "Weitzman" rule says that if MB is steeper than MC, a quantity instrument will be preferred; and if MC is steeper than MB, a price instrument will be preferred.
- Additional benefits of incentive based instruments include innovation and public revenue
- Categorizing pollutants -- stock vs flow; uniformly mixing vs not
- Hot spots and environmental justice may favor more prescriptive measures.
Domestic and Subnational Climate Policy
- Overview of the history of US climate policy.
- Taxes vs subsidies
- Overlapping state regulations
- Overlapping industry regulations