09.10.08 - ECONOMICS 1 Professor Kenneth Train 9/10/08...

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ECONOMICS 1 Professor Kenneth Train 9/10/08 Lecture 4 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. LECTURE Today I want to look at how we monetize the gains and losses that people incur from a change in policy. Most policies will help some people and hurt others. For example, rent control helps the renters who get units but hurt those who cannot get them; it also hurts the landlords because they receive less money. Let us put a value on cost and this benefit. This topic is used extensively by our government. Congress mandated that all new policies have to pass a cost-benefit test, which just measures the monetary values of costs and benefits involved in a policy. This helps rationalize the policies Congress engages in. So how we can use the concepts we already have to get to these measurements? DEMAND SIDE The first thing to recognize about demand is that market demand is made up of the demands and decisions of individual people. There is a concept that is useful for understanding people’s behavior, called marginal willingness to pay (MWTP.) This is the amount a person is willing to pay, if they had to, to buy one extra unit of a good. Take long distance phone calls for example. If you could only make one call per month, there is some maximum amount that you would be willing to pay to make that call. The value of that is very high to you because you can only make one. So for that one call, you are willing to pay $8.00. If you had a second call you could make you would be willing to pay less for the second call than the first one; you have already called that one most important person in your life, now you are calling the second-most important so you are willing to pay less for the call. Let us graph this. For each call there is a MWTP concept that helps you understand how markets behave. Marginal here means “for one extra.” This means that the MWTP for the fourth long distance call ($3.00) is not the amount you would pay for all four calls, but for that fourth one only.
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ECONOMICS 1 ASUC Lecture Notes Online: Approved by the UC Board of Regents 9/10/08 D O N O T C O P Y Sharing or copying these notes is illegal and could end note taking for this course. 2
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This note was uploaded on 07/25/2011 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at Berkeley.

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09.10.08 - ECONOMICS 1 Professor Kenneth Train 9/10/08...

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