Chapter 5[1] - Chapter 5 Dynamic Efficiency and Sustainable Development Introduction Chapter 5 deals with the treatment of future generations

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Chapter 5 Dynamic Efficiency and Sustainable Development
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Introduction Chapter 5 deals with the treatment of future generations. Topics covered include the concern of fairness in the allocation of a resource over time; the compatibility of equity and efficiency; sustainable development.
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Objectives Define the temporal allocation of a depletable resource over time. Using a two-period model, illustrate the maximization of net benefits over time. Show how this is done mathematically and graphically. Show how scarcity requires the balancing of present and future uses. Show how the solution requires marginal net benefits in period 1 to equal the present value of marginal net benefits in period 2. Define marginal user cost.
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Illustrate the effect of changes in the discount rate on the optimal allocations. Define intertemporal fairness and the sustainability criterion. Discuss the relationship between dynamic efficiency and sustainability. Define the “Hartwick Rule.” Define weak sustainability, strong sustainability and environmental sustainability.
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A Two-Period Model Assumptions Fixed supply of certain depletable resource Consider two time periods only Total supply is 20 units Demand (marginal WTP) is constant: 2 $ 4 . 0 8 = - = MC q P
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The Allocation of an Abundant Depletable Resource. (a) Period 1 (b) Period 2
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If supply is sufficient to meet demand, then a static efficient solution will provide the optimal allocations over time, regardless of the discount rate. For example, if the total supply of a
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This note was uploaded on 04/14/2010 for the course ECON 370 taught by Professor Helfand during the Winter '08 term at University of Michigan.

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Chapter 5[1] - Chapter 5 Dynamic Efficiency and Sustainable Development Introduction Chapter 5 deals with the treatment of future generations

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