Final exam review
Final will cover:
1. Energy
2. Fisheries
3. Forestry
4. Water
5. Biodiversity
Best way to study: Problem sets, lecture and this review
When: Monday, May 9 12-2 PM
Where: KUY 307 (here)
1. Energy: Transition Fuels
Transition Fuels
• Assume 3 possible fuels: oil, coal, solar
• Oil, coal: ↑ MEC, solar: HIGH constant MEC
• Oil used first (cheapest)
• As the MEC of oil ↑ relative to the MEC of coal, the
opportunity cost (marginal user cost) of using oil ↓.
• The transition point to a new fuel is when total marginal
cost of oil (MEC+MUC) is equal to total marginal cost of
coal.
2. Fisheries: CS, PS analysis
Incorporating CS & PS
into fishery models
• Figure 11.12 illustrates a family of supply
functions, each defined for a different level of
the fish stock.
• There are multiple equilibria, each associated
with a different supply and demand interaction.
• However, for each level of population
represented, there is only 1 sustainable level of
catch.
Incorporating CS & PS
into fishery models
• Figure 11.13 identifies the 6 sustainable catch levels
(catch=growth), each associated with a different supply
function (F1 – F6)
• These catch values are then identified on the supply curves
in Figure 11.14. (combines 11.12 + 11.13) For example,
the equilibrium catch associated with the max population
of F1 is zero, which is identified as point A on Supply
function SF1.
• Can you think of why this is?
• Sustainable implies catch = growth. At max pop (K), zero
growth.
The objective of fishery management would be to
choose a point along the sustainable catch curve that
maximizes the sum of economic rent + consumer +
producer surplus.
Incorporating CS & PS
into fishery models
• Figure 11.15 illustrates the bioeconomic equilibrium.
• It considers the intersection between demand, a supply function and
the biological equilibrium represented by a third backward bending
curve.
• Equilibrium occurs at point E (all 3 curves intersect)
• A sole owner of a fishery could locate at point F, which is associated
with a higher fish stock (easier to catch same amount).
• At point F, economic rent is equal to the area PEFB, consumers'
surplus is the area PDE, and producers' surplus is the area BFA. (price
and cost different here)
• At point E there would be no economic rent. This is consistent with an
open-access fishery.
3. Forestry: Overharvesting
Excess harvesting
• Figure 12.7 illustrates the excess harvesting which will
result when the full costs associated with use of the timber
resource are not reflected in the decision to harvest.
• M1 represents the square miles harvested when the
timbering firm does not recognize the cost of road building
or the other opportunity costs.
• As additional costs are added to the MPC, the optimal
quantity of timber harvested falls.
• Timbering companies choose too to harvest TOO MUCH
since true costs not included
4. Water: Pricing
Scarcity and the price of water
• Figure 15.1 illustrates how essential scarcity is in determining price.
• In this figure g0 represents the daily volume of water that may be removed
from the river.
• The cost of extraction is zero.
• Demand is represented by D1.
• Under these circumstances, all the demand that exists at zero price will be
satisfied.
• However, if Demand increases to D2, all the demand at zero price cannot be
satisfied.
• As demand increases, the opportunity cost/user cost of consuming the fixed
flow of water increases, which is reflected in the increased price (remember,
assumed MEC = 0)
Property rights
• Property rights must be well defined in order for a market
and a price to exist.
• Price will also reflect the MC of producing water.
• The cost of producing water takes the form of purification,
transportation, etc.
• If property rights are not well defined or other conditions
result in market failure, then the price will be too low and
this will lead to shortage as illustrated in Figure 15.2.
• Here, the price at which quantity demanded equals fixed
quantity supplied is p0, but a price of p1 would lead to a
shortage equal to g1-g0.
5. Biodiversity: Benefits
• Ecosystem stability and health
• People view a healthy and biodiverse ecosystem as
intrinsically more valuable than a degraded or less diverse
system
• Plants and animal species have value because they may be
used to produce economic goods
• Organisms’ genes may be a source of genetic information
that could be used in the development of new varieties of
plants
• Habitat provides an environment in which plants and
animals can exist
Invasive species policy
• Command and control
• Red vs. green listing
• The most promising economic incentive for
addressing non-native species is a liability system
which would make importers liable for future
damages associated with imported plants and
animals.