2. The only time the producer surplus does not equal profit is when there are fixed costs.
If we charge more, there will be less surplus, so it is not ideal. When we multiply x and y axis = dollars.
$/
Basket
S
Consumer Surplus Negative -
P* cost is more
than demand
Producer
Surplus
D
Quantity
Q*
4. The only time the producer surplus does not equal profit is when there are fixed costs.
If we charge more, there will be less surplus, so it is not ideal. When we multiply x and y axis = dollars.
$/
Basket
S = MC
Diminishing marginal utility is
why we have downward sloping demand curves.
Consumer Surplus
P* Demand curve = marginal benefit of adding
another basket of strawberries
Producer Why is that?
Surplus
D = MB
Q* = 3 Quantity
baskets
5. Demand Curve
Diminishing marginal utility is
why we have downward sloping demand curves.
Demand curve = marginal benefit of adding
another basket of strawberries
Why is that?
Eventually the marginal benefit is less than the price (that’s where S and D intersect)
Supply Curve
You have to be able to at least cover marginal costs - supply curve is equivalent to the marginal cost
curve.
Why does the supply curve go up?
Increasing Marginal Costs
Scarcity of supply - ie fertile land... once it’s used up you have to buy increasingly marginal land.
Prime coastal land - using the best resources first.
Especially agricultural land.
At the high end of the supply curve - rocky infertile land.
Also - limited amount of people who are really good at growing strawberries?
People with the really good land get all the profit. Marginal farmers just break even. Market price gets
determined by the marginal farmer - person with the good land gets the great profits.
Market prices are decided at the margins - last data point.
6. The only time the producer surplus does not equal profit is when there are fixed costs.
If we charge more, there will be less surplus, so it is not ideal. When we multiply x and y axis = dollars.
$/
Basket
S = MC
Diminishing marginal utility is
why we have downward sloping demand curves.
Consumer Surplus
P* Demand curve = marginal benefit of adding
another basket of strawberries
Producer Why is that?
Surplus
D = MB
Q* = 3 Quantity
baskets
7. Competitve Market
Lots of suppliers, lots of buyers, no one is a price maker or a price taker.
No collusion, monopolies, cartels, oligopolies, distortions...
Perfect competition for environmental resources is the exception, not the rule.
8. The only time the producer surplus does not equal profit is when there are fixed costs.
If we charge more, there will be less surplus, so it is not ideal. When we multiply x and y axis = dollars.
$/
Basket
S = MC
Consumer Surplus Moral of the story:
P* equilibrium is where
Marginal Benefit = Marginal Cost
Producer
Surplus
D = MB
Q* = 3 Quantity
baskets
9. Air Pollution
$ MC of abatement
NOT Supply and Demand of
Air Pollution
MBA* =
MCA* Marginal Cost vs Marginal
Benefit graph
Status Quo
0 MB of abatement
A* Abatement (tons)
10. The marginal benefit of pollution reduction is higher, the more air pollution there is.
(LA/Mexico City)
Eventually as you’re cleaning up the air, the marginal benefit becomes less and less beneficial.
Somewhere at the far end, it’s Monterey/Santa Cruz air.
Like Diminishing Marginal Utility
Easy ways of getting rid of pollution are cheaper, high costs associated with the last tons.
What does this marginal cost represent in the real world?
Regulations - scrubbers, energy-efficient lightbulbs, efficiency measures, catalytic converters,
cleaner diesel, no lead in gasoline...
IF you’re doing rational policy, hopefully you’
11. Marginal Cost Curve of Pollution Abatement is the cost of the technologies.
Marginal cost curve abatement for runoff near Elkhorn Slew
How would we do that?
*look at what technologies are in place to abate runoff
barriers, buffers, reduce waste of fertilizer/overuse, reduce irrigation so there’s less
excess water, levies, (buy the land where the pollution is coming from)...
For example - GHG abatement through water conservation.
Save transportation costs on water, reduce water use.
Really happened in an advanced econ class.
Where do the marginal benefits of abatement come from?
see how many more animals/plants are going to live
*how much tourists are willing to pay to visit?
HOW to translate environmental improvements into dollar values?!!
Marginal benefit of reducing climate change?
Extremely difficult!
Marginal cost is easy to graph.
Weird asymmetry - easy to measure one line, not the other one.
12. Speed Limits - up from 55 to 65
what have we done here (in cost-benefit analysis)?
We want to save time, and a few thousand people die every year.
We could reduce the speed limit to 5mph, no one would ever die.
No one will make that choice!
Life versus Convenience
People say Life is Priceless - but our actions prove that’s not true
Nice sentiment, something aspirational, but doesn’t guide our actions.
13. What are some problems with this Air Pollution graph?
It’s a beginning methodology
Getting MB measurements are very difficult.
This is a snapshot of a moment in time.
How are these trends going to shift in the future?
1 - technology will increase - MC curves will shift to the right
2 - policies aren’t dynamic
3 - what will happen to the MB curve?
people will value less pollution more? subjective element.
Human life is valued through how much earnings potential humans have.
So if you have a lot of econ/productivity growth, the MB goes up.
14. Air Pollution - GRAPH IN 5 YEARS
MC of abatement
$ MC New
Curves will shift out
due to technological
MBA* = increases, peoples’
MCA* perceptions, other
MC/MB shifts
MB New
Status Quo
0 MB of abatement
A* Abatement (tons)
15. Why is efficiency not enough?
Equity!
Need arguments for both aspects
Easier to talk about efficiency sometimes.
16. Market Failure
How do we use incentives to change attitudes?
A country paid McKinzie millions of dollars to do a study on how much
they should be paid NOT to cut down forests?
Cost Curve Mitigation CO2 - (Marginal Costs)
Why is there money to be made on this graph?
Because people aren’t rational actors, making perfect choices.
Because of risk-aversion, weird property rights, long-term savings,
why businesses wouldn’t make those choices.
Maybe because the transaction costs are really really high.
Not as cheap as it seems to an academic...
17. Nobody knows who’s right, hasn’t been answered yet.
10-15% of the climate change reductions could be profitable?
The business that’s offering to do energy-savings for businesses, they’ll
do the infrastructure improvements and recoup the savings.
Nuclear power -> livestock -> coal retrofits -> biodiesel
UNFCC - 450 ppm goal
350.org - Bill McKibben’s goal of GHG ppm
What’s the price per ton of GHG emissions?
Estimate a carbon tax in the range of $55/ton (40 Euros)
Abate the pollution if it’s cheaper - so you’ll get rid of everything below
the price point.
18. Why is the GHG abatement curve relatively flat?
So many ways to abate, that makes it a lot easier to find
alternatives, not have super high costs.
When you have something that can’t be replaced/substituted costs
are higher.
Without government intervention, will MB=MC?
Not even close. Markets don’t work well for enviro issues.
Problem of collective action.
19. (Five) Conditions for Well-Functioning Markets
1-Perfect Information
What you’re buying, producing... can’t value it if you don’t know what it is.
(we don’t even know what 95% of the chemicals in us are doing,
and the 5% we know about are killing us.)
2-Secure Property Rights
We need liability, to hold people accountable, to limit the use of things.
A lot of the enviro problem is people using too much/ no limits.
Atmosphere and open oceans - two tragedies... also most forests.
3-No Externalities
Everyone who buys something gets the full benefit.
Everyone who produces/uses things pays the full cost - don’t impose on others.
4-Perfect Competition
Can’t have price-takers/price-makers or they’ll raise the price above the point that maximizes
efficiency.
In some markets we have reasonable competition, but often not with natural resources -
oil, fish, energy, minerals, etc.
5-Complete Markets
Almost exist in developed countries. You can get insurance for environmental/disaster events.
Emerging markets don’t have access to these things.
20. If people who are libertarians, classical economists, want
to say they’re free market economists -
They don’t know what they’re talking about.
There’s almost 100% consensus among economists
worldwide that we need government intervention.
NONE of these conditions exist for well-functioning
markets. The markets will never get us to optimal costs.
Collective action tragedy. Economic case for government
intervention to at least try to address market failures is
air-tight.
