EC145E Lecture 3 - EC 145E Environmental Economics UCI Dr...

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EC 145E Environmental Economics UCI Dr. Bresnock Lecture 3 II. Dynamic Efficiency – resources re allocated to achieve the maximum net benefit over 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 MNB 1 = MNB 2 = ·············· = MNB n where 1 , 2, ·········, n = different time periods (MNB = Marginal Net Benefit = Marginal Social Benefit – Marginal Social Cost) (MARGINAL APPROACH) The Total Approach and Marginal Approach entail usage of the Benefit-Cost Analysis evaluation method. This approach is used for public sector decisions, and is analogous to a business firm’s profit-and-loss analysis. With public decisions often unmarketed types of outputs, i.e. environmental improvement, are evaluated; in a firm’s analysis, marketed types of outputs are the focus. Benefit-Cost Analysis = the primary framework of analysis used to decide on the “best” course of action among the alternatives. Its first usage was in the 1936 U.S. Flood Control Act. From the 1980s to the present, there has been a lot of renewed interest in using benefit-cost analysis for program approval. By executive order (Reagan, 1981), all major government regulations are required to complete a benefit- cost analysis. The Regulatory Right to Know Act (Congress, 2000), requires agencies to do benefit-cost analysis of their programs and regulations. Two types of public environmental programs to which benefit-cost analysis may be applied are: (a) Physical projects – involve direct public production. Ex. building dams, trash incinerators, water treatment plants; habitat improvement; wetlands preservation, etc. (b) Regulatory programs – goal is enforcing environmental laws and regulations. Ex. pollution-control standards, waste disposal practices, land development restrictions, pollution control technologies, etc. A. What is the Present Value Method? To estimate benefits and costs when these benefits and costs occur across multiple time periods, the present value method is utilized. This method involves the discounting technique which converts all benefits and costs that occur in different time periods to comparable present day values.
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Environmental Economics Dr. Bresnock Lecture 3 2 Discounting converts future values to present values. Compounding converts present values to future values. Ex. If r = .06 where r is the interest rate then: Compounding : $1 today = $1 (1 + r) 1 = $1.06 at end of Year 1 $1 today = $1 (1 + r) 2 = $1.1236 at end of Year 2 Discounting : $1 at end of Year 1 today = the present value (PV) of that $1 today: PV 1 = $1 = $1 = .9434 (1 + r) 1 (1.06) $1 at end of Year 2 today = the present value (PV) of that $1 today: PV 2 = $1 = $1 = .8899 (1 + r) 2 (1.1236) Note : Here r is referred to as the discount rate . The discounted present values
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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 3 - EC 145E Environmental Economics UCI Dr...

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