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**Upcoming in Class**• Homework #8 due • Group Outline due • Next Thursday • Homework 9 • Quiz 4**Homework 8**• Suppose a proposal is made to construct a new interstate highway through a plot of undisturbed land. Briefly summarize how you would use cost-benefit analysis to evaluate this proposal. What economic techniques would you use to assess some of the environmental impacts?**Homework 8**• What is the difference between willingness-to-pay and willingness-to-accept? Do the two measures tend to be similar when used to value the same good or service? Why is this a problem with economic valuation?**Chapter 6 – Discount Rate**Accounts for the time value of money Rate at which a dollar value increases over time Present Value – The value of money in the future, put in terms of the value of money today.**Discounting**For the ith period PV [Bi] = Bi/(1+r)i For the sum across all period PV [B] = ∑i=1n Bi/(1+r)i**Discounting & Environmental Policies**The discount rate affects policies that have long term consequences. For example, consider the construction of a dam. 3 years to build 50 years of operation 50+ years of environmental damage**Discount Rate**• If r is set high • The short run is favored. • Poor societies where struggle for today is impossible • Developed countries where the term of office for policymakers is short • Benefits of dam will be stated as smaller • But so will the cost environmental damage**Discount Rate**• If r is set low • Weights long term environmental damage heavier. • If the damages extend beyond the life of the project, then it is likely that the project will be canceled.**Discount Rate and Policy**• Neither a high or low discount rate is better for environmental valuation. • Low discount rates are often advocated on the needs of future interests • Global Climate Change • Soil Erosion**Discount Rates Utilized**OMB = rate of return on government bonds (1.6 to 3.5) World Bank often uses 10 Sensitivity Analysis is an analytical tool that studies how the outputs of a model changes as the assumptions of the model changes.**Future Outcomes**Risk – the probability that an event will happen Uncertainty – different outcomes may occur Consider a person who smokes**Expected Values**EV [X] = p[X] C[X] p is the probability of event X occurring C is the cost of event X**Expected Values**• Risk aversion is the tendency to prefer certainty instead of risky outcomes, particularly in cases where actions may cause significant negative consequences • Precautionary principle is the view that policies should account for the uncertainty by taking steps to avoid damaging outcomes, especially when the outcomes are irreversible**Chapter 12 – Non-renewable Resources**Physical supply - available reserves measured in physical terms without regard for cost and value Economics supply – the amount of a resource that is available based on current prices and technology**Reserves**Identified reserves – the identified quantity of a resources; includes both economic and subeconomic reserves Indicated or inferred – resources that have been identified but whose exact quantity is not known with certainty**Undiscovered Reserves**Hypothetical – the quantity of a resource not identified with certainty but hypothesized to exist Speculative – the location and quantity of a resource has not been identified but is hypothesized to exist**Resource lifetime**Subeconomic resources – resources whose costs of extraction are too high to make production worthwhile Economic reserves – resources of high enough quality to be profitably produced and are identified**Resources**• Changes to reserves • The resources is extracted and used => diminished reserves • New resource deposits are discovered => increasing reserves • Changing price and technology can make more or less of the known reserves economically viable**“Limits to Growth”**• http://en.wikipedia.org/wiki/The_Limits_to_Growth • Written in 1972, predicting over use of resources • http://en.wikipedia.org/wiki/The_Population_Bomb • Written in 1968, predicting a population crash due to resource scarcity • The wager : http://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager**Optimal extraction**R=P-MC PV [R] = R0 + R1/(1+r) + R2/(1+r)2 +… Optimal extraction quantity R0= R1/(1+r) = R2/(1+r)2=… Hotelling’s Rule - net price rises over time with the rate of interest.**Marginal Cost of Extraction**Technology Decreases marginal cost of extraction Higher quality resources will be extracted first. => subeconomic resources may become economic when the price rises or technology improves**Resource Extraction**Choke price – the minimum price of a good or service that would result in a zero quantity demanded Price path – the price of a resource over time Extraction path – the extraction rate of a resource over time**Upcoming in Class**• Homework #8 due • Group Outline due • Next Thursday • Homework 9 • Quiz 4