notes_4_21_2010

notes_4_21_2010 - Natural Resources and Supply and Demand...

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Natural Resources and Supply and Demand after a Treaty Limits Over-Harvesting
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What does Government do? • Tax • Provide public goods • Provide 3 rd party information (certification, verify quality) • Regulate
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Regulation of Polluters • “The Basic problem of environmental regulation involves the government trying to induce a polluter to take socially desirable actions, which ostensibly are not in the best interest of the polluter. But the government may not always be able to precisely control the polluter. To further complicate matters, the government faces a complex problem of determining exactly what level of pollution is best for society. In reality, the government faces pressures from consumers and polluters.” (Charlie Kolstad UCSB)
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Public Goods • A pizza is a private good. If Matt eats it Frank cannot • Clean Air in a city is a public good, we can all enjoy the clean air simultaneously • You cannot be excluded from enjoying this clean air if you live in the city
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What is the “Optimal Amount” of Public Goods Provision? • Consider a case where a society consists of three people named Matt, Jill and Frank • This society must decide on how many Eagles to protect • Each member of the society likes eating pizza (private good) and having Eagles flying around (the public good) • The following matrix provides specific details about preferences (based on slopes of indifference curves for different types of people)
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Data Matrix --- all entries are measured in $ except eagles! Eagles Matt’s WTP Jill’s WTP Frank’s WTP Total WTP Cost 1 100 30 50 180 50 2 150 40 80 270 110 3 170 45 100 315 300
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Aggregation of Benefits • Since the eagles are a public good, to calculate the society benefits from providing eagles, we add up individual benefits across all people • Simple cost/benefit analysis asks that we compare the benefits to the costs • Protecting 2 eagles is the social optimum in this case --- 270-110 is the maximum increase in consumer surplus for the 3 choices
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Free Riding • Suppose there is no government • Instead, a collection plate is handed to Matt, Jill and Frank and they are each asked to make a contribution • If the sum of the money collected exceeds the cost of eagle protection, then the eagle protection will take place • What will be the equilibrium?
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Jill’s logic • “The total cost of 2 eagles is $110. Matt values them at $150 and Frank values them at $80, if I contribute $0, 150+80>110 and so I’ll achieve the win-win of the same enjoyment of the 2 eagles and I will have $40 dollars of private consumption” • Note the non-excludability here; the self interested person knows that she can’t be excluded ex-post from enjoying the “purchased” eagles
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The Problem! • We have just shown that Jill will under-state her
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This note was uploaded on 11/12/2010 for the course ECON M134 taught by Professor Bresnock during the Spring '08 term at UCLA.

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notes_4_21_2010 - Natural Resources and Supply and Demand...

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