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Unformatted text preview: Environmental Economics by Peter Berck and Gloria E. Helfand Draft August 16, 2006 Copyright 2006 by Peter Berck and Gloria E. Helfand Contents: Chapter 2 The Market Outcome Chapter 3 Markets and Market Failure Chapter 4 Consumer Behavior and Demand Chapter 5 Willingness to Pay, Consumers Surplus and Other Measures of Value Chapter 6 Revealed Preference Methods Chapter 7 Stated Preference Chapter 8 Input Choice and Cost Chapter 9 Marginal Cost and Supply Chapter 10 Long Run Supply with Standards and Taxes Chapter 2. The Market Outcome. OBJECTIVES: Supply and demand are the simplest and yet most powerful concepts in economics. They help us to understand why some goods are more abundant than others, why some goods are more expensive than others, why we sometimes cant get what we want, and why sometimes we get too much of some things. In this chapter we examine the basic principles that determine price and quantity in a market, some of the ways that governments act to change market outcome, and how supply and demand analysis can help understand the effects of those actions. We put supply and demand to use right away to explore the market for energy and the effect of one agricultural policy on land use. Markets both operating freely and in the presence of government regulation determine the huge range of goods and services we use on a daily basis. As we explore, we will discover: That prices and quantities in a free market are set through the interactions of buyers and sellers. How producers decide how much to produce. How consumers decide how much to consume. When a market is in equilibrium. How government intervention can change a market, which in turn affects the environment. An Energy Crisis As a result of the deregulation of California's energy market two years ago, public utilities, like Southern California Edison and Pacific Gas and Electric, were instructed to buy and sell power through the exchange, in part, to block sweetheart deals with power generators. But in recent weeks, the California Independent System Operator, the nonprofit group that manages the state's power grid, has been forced to scramble daily for as much as one- third of the electricity the utility companies need to keep lights on in the state. Electricity prices for peak hours have soared to $1,400 per megawatt per hour, a more than 20-fold increase from last year. The Independent System Operator has been spending an additional $50 million to $100 million a day for electricity, costs that are passed onto utility companies and ultimately consumers. Government Acts to Calm California's Energy Market Laura M. Holson. New York Times (Late Edition (east Coast)). New York, N.Y.:Dec 16, 2000. p. A.14 Electric utilities used to be heavily regulated by the government. In recent years, though, there has been a trend both in the United States and in Europe to allow the market to determine the price that consumers pay for electricity, rather than have the government determine the price....
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