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Notes for Chapter 3

Notes for Chapter 3. ECON 2390. Benefit-Cost Analysis. Benefits to the consumer The key to a benefit that anything of value will be acquired by giving something up. Typically measured as consumer surplus.

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Notes for Chapter 3

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  1. Notes for Chapter 3 ECON 2390

  2. Benefit-Cost Analysis • Benefits to the consumer • The key to a benefit that anything of value will be acquired by giving something up. • Typically measured as consumer surplus. • Willingness to pay is the key idea and equals the difference between the maximum the consumer would be willing to pay and the actual purchase price.

  3. Consumer demand • Consumer demand depends on price or the produce, price of complements and substitutes, income, wealth,…. • Typical relationships focus on quantity demanded and the “own” price. • QD = a – BP • P = a/B – (1/B)QD

  4. Willingness to pay • The demand curve represents the willingness to pay • Pe is the equilibrium price • Consumer surplus is the triangle PeAB

  5. Producer Surplus • The supply curve represents the willingness to offer • This is an idealized relationship (see notes page) • Pe is the equilibrium price • Producer surplus is the triangle PeAB

  6. Derivation of marginal cost • Total supply • QS1 = 3p-4 • QS2 = p-2 • QS1 + QS2 =QT = (3p-4) + +p-2) = 4P-6 • Marginal cost • MC1 = 4/3 +1/3QS1 • MC2 = 2 + QS2 • MCT = 3.2 + 1/4QT

  7. Social welfare • The sum of producer and consumer surplus equals social welfare • If a change, such an environmental regulation increases social welfare, then that policy should be adopted. • Benefit cost analysis is the study of investments and policy that are designed to increase social welfare. • Environmental goods are and increasingly important element of social welfare. • Ability to pay is an important limit to willingness to pay.

  8. Consumer + producer surplus = social surplus • Perfect competition maximizes social surplus • The point X* is allocatively efficient • Any deviation, such as rationing, reduces the social surplus

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