Res Econ 1
Terms
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- Willingness to pay
- The value of a good or service is what a person is willing and able to pay to obtain the good or service.
- Characteristics of willingness to pay
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Diminishing marginal WTP
The more a person has already purchased and consumed of the good, the less she is willing to pay for an additional unit. ($17 down to $12)
Increasing total WTP
However, she is willing to pay more for greater quantities of the good. She prefers to have more of a good than less of it. (Increase in total WTP is shaded) - Economic Benefits
- The benefit that a person gets from something is what she is willing to pay for it, even though she may not have to.
- Opportunity costs
- the value of something in it next most valuable use.
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negative externality
External cost -
A negative externality exists when the activity of some agent causes a loss to another without consent and without compensation.
External cost is the loss from a negative externality. - Technology
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is the collection of knowledge underlying the methods and machinery used to turn inputs into output.
Technology typically lowers marginal costs of production - cost-effectiveness
- means achieving a goal at lowest cost.
- equi-marginal principle (production version)
- allocate production responsibilities between the plants so that their marginal costs of production are equal.
- perfectly competitive
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if no firm can affect the price of output.
Such a firm will choose its level of output so that the market price is equal to its marginal cost. - Efficiency
- strikes a balance between the value of what is produced and the cost of producing it.
- The efficient level of production
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the total social benefit of consuming the good minus the total social cost of producing the good is as large as possible.
benefit-cost= max - When is a market efficient?
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Aggregate Supply = Social Marginal Cost
and
Aggregate demand = Social Marginal WTP - External Costs and competitve markets
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If external costs are present, a competitive market will not achieve an efficient level of production and consumption.
In fact, competitive production will be too high (G* < Gm), and competitive prices will be too low (p* > pm). - Common property or open-access resources
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These resources are un- owned, or if they are owned the owner cannot restrict exploitation of the resource by others.
The market failure with these resources is that exploiters have little incentive to conserve, so they tend to be over-exploited. - Policies that mandate certain methods of pollution control
- policies that mandate certain methods of control, such as those that require a certain abatement technology, will make the source’s abatement costs higher if these methods are different from what the firm would choose on its own.
- Factors that affect the efficient level of emissions
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A change in the number of people impacted by pollution
-- Higher MD function. Lower efficient level of emissions
An improvement in abatement technology
--Lower MAC function. Lower efficient level of emissions
An increase in the number of polluting firms
--Higher MAC function. Higher efficient level of emissions