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slides_1 - What is Environmental A. B. C. D. Externalities...

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11 What is Environmental A. Externalities B. Private Property and Public Property C. Local public goods D. Public goods
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22 “Conventional” Microeconomics Utility maximizing consumers go to the market to buy goods they want They are the demanders Profit maximizing firms produce goods and services and bring them to the market They are the suppliers Equilibrium prices adjust such that aggregate supply equals aggregate demand in each market
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33 “Conventional Micro” Continued In Standard Micro, there is a market for every good we want whether it is cream cheese, light beer or small shoes or bad coffee Property rights are well defined over all goods Laborer owns himself/herself and can sell labor time to a firm and be paid a wage Firms own their output until a consumer pays for it
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44 How Does Environmental Economics Build on “Micro”? Externalities and social cost versus private cost Consider a steel factory that seeks to maximize its own profits by selling Q units of steel The market price of steel = P The cost of hiring labor and capital to produce Q units of steel = 10 + 2*Q2
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55 Profit Maximization Profit = revenue – cost Profit = P*Q - 10 - 2*Q2 Suppose that P = 36 so that marginal revenue = 36, in this case: Profit = 36*Q - 10 - 2*Q2 The profit maximizing output level for the steel firm is to set Q = 9 and profit for the firm = $152
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66 What does society think of this privately optimal choice? In the absence of an externality, the profit maximizing firm produces that amount of steel such that the marginal benefits of production = marginal revenue = 36 just equals the marginal cost to the firm of production Note that given the cost function, the marginal cost = 4*Q and when Q= 9, marginal cost = 36!
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77 Introducing the Externality! Suppose that an unintended consequence of each unit of steel production (Q) is 2 units of pollution Engineers could estimate this relationship given information on the vintage of the factory and the type of output (in this case steel used) and the types of technology used at the factory
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88 The Health Consequences From this Pollution Suppose that public health researchers have collected data for many people, they observe how many days a person is sick and how much pollution a person is exposed to: Using this data, the researchers estimate a statistical production functions of the form: Sicknessi = b0 + b1*Pollutioni + Ui Assume that b1=.2, intuitively a 5 unit increase in pollution exposure raises sick days per year by 1
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99 How Much Do People Value Not Being Sick? Suppose that sick people cannot go to work and that they lose a day of earnings when they are sick Assume a person’s daily wage = 4 There are alternative approaches to measuring the value of a person’s time besides for using their wage rate
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1010 Putting the Pieces Together to Measure the Steel Plant’s
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slides_1 - What is Environmental A. B. C. D. Externalities...

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