eenotes_markets - MARKETS AND MARKET FAILURES I Social...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: MARKETS AND MARKET FAILURES I Social Choice: How much environmental protection? A Utility Recall that environmental protection costs resources. How are we to decide how much resources to allocate to environmental protection and how much to allocate to other goods? We start by treating environmental protection much like any other good. Let x be a set of goods and e be the quality of the environment. A CONSUMPTION BUNDLE or ALLOCATION is a set ( x,e ). Just like we get enjoyment or utility from conventional goods, we get utility from a clean environment. Let u i ( x,e ) denote the utility person i gets from the allocation ( x,e ). 1 Utility value of environmental goods The reasons people get utility from a clean environment vary from person to person and include: 1. HEALTH BENEFITS of clean air and water. These include lower incidences of asthma, bronchitis, lung cancer cholera, etc. 2. USE VALUE . Enjoyment from visiting or viewing a clean environment. This includes things like whale watching, fishing, or simply looking out your window and not seeing smog. 3. EXISTENCE VALUE . Utility achieved without using the environment in any material way. Like a car that has a top speed of 200 mph, we value some things because they are there, even if we do not plan to use them. 4. ALTRUISM : we care that someone else has a good environment. u i ( x,e ) = u i ( x,u j ( e )). 5. PRODUCTIVITY VALUE : A clean environment makes producing non-environmental goods easier. Climate change matters almost exclusively to the extent that it causes production losses. For example, CO 2 emissions raise temperatures which cause crop losses in agriculture, and damage to industries such skiing. u i ( x,e ) = u i ( x ( e )). So we need to think carefully in each context about what e represents. The “consumption” of e could be “healthiness,” which declines with pollution, or e could be “fishing,” which 13 declines with mercury emissions, or e could be the knowledge that the Arctic wildlife refuge is pristine. In addition, we can switch our thinking: • GOODS : consumption of a good gives utility. • BADS : consumption of a bad lowers utility. It makes no difference whether we think of clean water as the good or mercury emissions as a bad. We will use whichever is easier, but here e is the good. 2 Indifference Curves Recall INDIFFERENCE CURVES represent different allocations which give the same utility. If u ( x,e ) = u ( x ′ ,e ′ ) = u , then both allocations lie on the same indifference curves: e x e’ x’ e x U U 2 U 1 U < U 1 < U 2 Figure 7: Indifference Curves. Notice utility increases as we move either up or to the right. More goods implies higher utility. Notice also I have drawn convex indifference curves. This results from diminishing returns. If we have already many televisions then we do not value additional televisions very 14 much. If an allocation has many televisions and a poor environment, then to we can get the same utility by giving up a television for a very small improvement in the environment.same utility by giving up a television for a very small improvement in the environment....
View Full Document

Page1 / 22

eenotes_markets - MARKETS AND MARKET FAILURES I Social...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online