Efficiency
Slides [link]Lecture 1
Static efficiency
Required
- Read KO Chapter 2 pp 11-30
- Read sections 1-5 of EPIC’s AQLI “Pollution Facts” page.
Response questions
- What are the main benefits of reducing particulate matter emissions?
- Particulate matter concentrations in the US are 30%-40% lower today than they were 20 years ago (data here). Given that, do you think the marginal benefits of reducing PM by one unit are higher or lower today?
- What are the main costs of reducing particulate matter emissions?
- Do you think the marginal costs of reducing one unit of PM are higher or lower today, compared to 2000?
Lecture 2
Dynamic efficiency
- Read Keohane and Olmstead (KO) Chapter 2 pp 30-34
- Read the New York Times “Climate Change FAQ”
Response questions
- What do you think the most important damages of unmitigated climate change are? (list 1-2) Do you think these effects will primarily be felt now or more so in the future?
- What are some of the main costs of mitigating climate change? If serious climate change is to be avoided, will these costs largely be paid now or in the future?
Additional material
- CRS videos on Discounting and Net Present Value Analysis
- BH Chapter 15 - Discounting on canvas
- For a more technical summary of current climate science, see the IPCC’s recently released Sixth Assessment Report. NY Times summary here.
- Mark Bitman’s short NY Times article on “The True Cost of Burger” is a good example of what market prices leave out.
- Read KO chapter 4 if you need a refresher on the efficiency of markets (optional)
Key Points
- 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.