exam 1 review
environmental decision making:
benefit-cost analysis
n
PVNB  PV[ NB0 ,..., NBn]  
i 0
n
Bi

i
(1  r )
BC Ratio  i n0
Ci

i
(
1

r
)
i 0
NBi
i
(1  r )
how do we get those benefits?
Methods Revealed pref
Stated pref
Direct
market price
contingent valuation
Indirect
travel cost
attribute-based
models
hedonic property
conjoint analysis
hedonic wage
choice experiments
avoidance expenditures
contingent ranking
nature and causes of environmental problems
• Nonexclusive property rights =>
Externalities
• No property rights =>
Open access problem
• Public goods
the market for steel
expect 5 results
1.
output of steel too great
2.
too much pollution produced
3.
price of steel too low
4.
no incentives to search for ways to yield less pollution
per unit steel
5.
recycling and reuse of polluting substances
discouraged since release into river is so inefficiently
cheap
to correct externalities
• bargain (Coase)
• taxation (Pigou)
open-access
• fishing / grazing rights / whales vs.
chickens
• tragedy of the commons
• common-pool resources
– nonexclusivity (exploited by anyone)
– divisibility / rival (your use diminishes my use)
bison harvesting
public goods
• characteristics
– nonexcludable (even if do not pay cannot be
excluded from enjoying it)
– indivisible / nonrival (my enjoyment does not
lessen your enjoyment)
• national defense / air / information /
diversity
• free-rider problem
how to think about the future?
• Two period model
• To maximize dynamic efficiency, set PV of
MNB from the last unit in period 1 equal to
the PVMNB from the last unit in period 2.
Demand: P = 8-0.4Q, MC = $2 (constant)
20 total units
10.238 units in period 1 / 9.762 units period 2
Efficient prices? Marginal user cost?
definitions of sustainability
• Hartwick rule (“weak sustainability”)
– value of the total (natural + physical) capital stock is
maintained
• Strong sustainability
– value of the natural capital stock is maintained
• Environmental sustainability
– quantities of resources should be maintained (not
value)