EC145E Lecture 2 - EC 145E Environmental Economics VCI Dr....

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Unformatted text preview: EC 145E Environmental Economics VCI Dr. Bresnock Decision-making criteria with respect to environmental concerns involve a balance, or trade-off, between creation of value, or benefits, and creation of costs. Such decisions may be static in the sense that the decision is made at a point in time. In a static analysis, it is assumed that the impacts of pollution are independent of actions taken in other time periods. Other decisions, are dynamic, or intertemporal, with the impacts of the decision occurring across multiple time periods. In an dynamic analysis, it is likely that the impacts of pollution are dependent of actions taken in other time periods. I. Static Efficiency- resources are allocated to achieve the maximum net benefit at a point in time. The objective for society is to allocate resources so as to: Max (Total Social Benefits- Total Social Costs) or (TOTAL APPROACH) Max Net Social Benefits Benefits are represented by an individual's willingness to payor demand. "Willingness" has to do with a person's preferences, and it constrained by their ability to pay. Total Benefits (TB) (or total willingness to pay) are calculated as the area under a demand curve for the range of units being considered. TB reflects the amount of money a person is willing and able to pay for some # of units of a good or service. $ h'~' 31 f4~ h'~\M'e- .1 10 5 u.ni+S ;:; ~7. So ~ la50 1 6 ~ s Environmental Economics Lecture 2 Marginal Benefits (or marginal willingness to pay) (MB or MWTP) are graphed as the demand for the particular environmental resource. MB = D = MWTP = additional willingness to pay, or additional benefit, associated with consuming an additional unit of an environmental resource. MB reflects information about consumer preferences, income, expectations, etc. j L ..... 4 j ( D = M"B I I I a.. 3 Lot Q , __ L __ ~ fi~ . 3.\ f .J.l'i mB <% 3\"d v..n\-t = $' Li (1) Diminishing Marginal WTP - the more a person has already purchased and consumed of resource, the less they are willing to pay for an additional unit. (2) Increasing Total WTP- A person is willing to pay more for greater quantities of a resource because they prefer to have more of a resource than less of it. Shapes ofMWTP (or MB or D) Curves #> Different consumers, same good; Different goods and same consumer e; Different willingness to pay due to different tastes/preferences, income, # of consumers Environmental Economics Lecture 2 "Individual" demand, or willingness to pay, shows the quantities that an individual is willing and able to purchase at each alternative price. "Aggregate" (or Market) demand for market goods shows the aggregate willingness to pay, and it is calculated as the horizontal summation of the individual demand curves - add the quantity demanded for each person at each alternative price....
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This note was uploaded on 02/10/2012 for the course ECONOMICS 140 taught by Professor Unknown during the Winter '11 term at UC Irvine.

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EC145E Lecture 2 - EC 145E Environmental Economics VCI Dr....

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