9 - This Lecture: Benefit-Cost Thinking Benefit Cost...

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This Lecture: Benefit-Cost Thinking Benefit Cost Analysis in the present: – Should we regulate agricultural non-point source pollution? (B enefit C ost A nalysis/compensation test) A classification of Economic Values. – Motivated by the compensation test and the need to estimate “benefits to whomsoever they may accrue”. – Should we create a National Park in Cameroun? Next Lecture: – Should we invest in improved pollution control for the Navajo Power Plant? (Compensation test over time, discounting, intertemporal choice) Later in the semester: – Invest now to stop global warming damage in 100 years? (Ethics: What is the appropriate discount rate?)
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Economics The study of how people and society choose to allocate scarce resources that could have alternative uses. Positive economics: descriptive - if you do X what happens? Normative economics: should we do X? Welfare Economics Goal: to maximize well-being or “welfare” that society derives from goods and services. – including natural resources and environmental quality. Compare current situation (status quo) with alternative situation.
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Welfare Economics: Examples of Questions Would the well-being of society be improved by reducing Sulfur Dioxide emissions at the Navajo Power Plant and thus improving the winter visibility in the Grand Canyon National Park? Would the well-being of society be improved by reducing the maximum arsenic level found in public drinking water supplies from 50 ppm to 20 ppm?
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Defining Social Well-Being Economic Assumptions: 1. Consumer Sovereignty : individual is the best judge of her well- being. 2. Social welfare : defined as some aggregated well-being of all individuals. Pareto criterion : society should only adopt projects that make at least one person better off and no one worse off. Is there a problem with the Pareto Criterion? U B U A
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Defining Social Well-Being Economic Assumptions: 1. Consumer Sovereignty : individual is the best judge of her well- being. 2. Social welfare : defined as some aggregated well-being of all individuals. Pareto criterion : society should only adopt projects that make at least one person better off and no one worse off.
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Compensation Principle (Benefit-Cost-Analysis: BCA) Can the “winners” (i.e. water consumers) from a policy potentially compensate the losers (i.e. farmers) and still be better off? In other words, do the benefits of the policy exceed the costs? U B U A
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Compensation Principle (Benefit-Cost-Analysis: BCA) Can the “winners” (i.e. water consumers) from a policy potentially compensate the losers (i.e. farmers) and still be better off? In other words, do the benefits of the policy exceed the costs?
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Should we keep a National Park open if the expected revenues don’t exceed the expected costs? A proper measure of
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This note was uploaded on 12/16/2009 for the course AEM 2500 taught by Professor Poe,g. during the Fall '07 term at Cornell University (Engineering School).

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9 - This Lecture: Benefit-Cost Thinking Benefit Cost...

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