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62 Cards in this Set

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  • Back
first law of thermodynamics applied to enviro as a closed system
energy / matter can't be created / destroyed

materials from the enviro flowing into the economy has to either accumulate in econ system or return to enviro as waste
second law of thermodynamics applied to enviro as a closed system
entropy (amt of energy not available for work) increases

no conversion of energy is completely efficient

in closed sysem --- no energy inputs -- so eventually system will use up all its energy
positive economics
what is / what was / will be

usually resoved with facts

(the different impacts something has)
normative economics
what ought to be

involve value judgements

(how desireable something is.... how much we should do)
demand curve
measure amt of a good ppl would be willing to buy at different prices

adding all individuals == market demand curve
total willingness to pay
the sum of the willingness to pay for each unit

[for 3 units, TWP = (wtp unit 1) + (wtp unit 2) = (wtp unit 3)]

*aka total benefits*
opportunity cost
net benefit lost when specific enviro services are foregone in the conversion of enviro services to a new use

(*ex* river used for canoeing or for power -- opportunity cost of producing power is the net benefit you would have had from using it for canoeing)
marginal opportunity cost curve
the additional cost of producing the last unit

**identical to the supply curve in purely competitive markets**
total cost
sum of marginal costs

(total cost for 3 units = cost of producing 1st + cost of 2nd + cost of 3rd)
net benefit
excess of benefits over costs

the portoion of area under demand curve that is above the supply curve
measuring costs/ benefits that occur over time
use present value
present value
compares net benefit at one time to with net benefit at another time

X / (1 + r)^n

(X = money today
r = interest rate
n = years from today)
static efficiency
allows you to choose between different Q's at same point in time

**used when time isn't a factor**

in normative economics

allocation is efficient if net benefit is maximized @ that amount
"first equimarginal principle"
net benefits are maximized when marginal benefits @ allocation equal the marginal costs
dynamic efficiency
when allocation across n time eriods maximizes the present value of net benefits (compared to other ways of allocating the resources over n periods)

use present value
**when time is a factor**
stock / flow values
the value of a stock should = the present value of the stream of services flowing from the stock

if present value of flow is maximized then resource is being used efficiently
total economic value of resource

3 categories
1- use value

2- option value

3- nonuse value
use value
the direct use of the enviro resource

(fish havested from the sea
loss of use value = oil spill effects fishery negatively)

**value from current use**
option value
the value people place on the future ability to use the enviro

the willingness to preserve the option to use the enviro in the future... even if you're not currently using it

**desire to preserve for possible future use**
nonuse value
people are willing to pay for improving / preserving resources they'll never use

pure non-use value aka existence value

(ex trying to build dams near grand canyon sierra club protests potential loss of unique resouce)

*doesn't derive from direct or potential use*
total willingness to pay =
TWP = use value + option value + nonuse value
DIRECT OBSERVATION METHODS

measuring resource value
*based on observable choices and actual resource values can be directly inferred*

**ex**how much catch declined and teh value of the catch ... from oil spill in fishery**

1- MARKET PRICE
2- SIMULATED MARKETS
DIRECT HYPOTHETICAL METHODS

measuring resource value
when value not directly observable

**ex** nonuse value of spotted owl not observable

1- CONTINGENT VALUATION
contingent valuation

(direct hypothetical method to measure value)
means to derive values that can't be obtained more traditionally

1- survey what value ppl would place on an enviro change or the value placed on preserving the resouce in its current state

2- survey whether ppl would pay $X to prevent change or preserve current condition
(answers upper bound in "no" answer and lower bound in "yes" answer)
types of BIAS in contingent valuation

(prob with method)
1 - strategic bias

2- information bias

3- starting-point bias

4- hypothetical bias
STRATEGIC BIAS

(in contingent valuation)
biased answer to influence a particular outcome

*ex* ppl who enjoy fishing say they value it higher than they really do to preserve stretch of river
INFORMATION BIAS

(in contingent valuation)
when respondents place value on attributes they have little / no experience with

*ex* in survey of loss in water quality of one body of water based on substituting other body of water ---- and respondent has no experience using second body of water
STARTING-POINT BIAS

(in contingent valuation)
when respondent must choose answer from predefined range of possibilities
-- how range is defined can affect results

*ex* range of $0 -$10 can produce different value than a range from $10-$100 even if no one wants the values from $0-$10
HYPOTHETICAL BIAS

(in contingent valuation)
respondents provide ill-considered answers bc faced with hypothetical -- not actual set of choices ... .
they wont actually have to pay the estimated value

**ppl say they'd be willing to pay more than they actually would**
concerns with using contingent valuation

(not biases)
1- tendency for WTP estimates to be unreasonably large

2- difficulty in knowing the respondents have understood the issues presented

3- difficulting in assuring respondents are responding to the specific issue -- rather than reflecting the "warm glow" of giving
meta-analysis

to resolve problems with contingent valuation
using many surveys to isolate the influencing factors of nonuse value

once you know the different determinants --- you can transfer estimates from one context to another

(then you wont use time and money to conduct new surveys each time)
INDIRECT OBSERVABLE METHODS

measuring resource value
involve actual behavior and must infer value... not estimate it directly

**ex** reduction in fishing due to pollution at FREE fishery*

1-travel cost methods
2- hedonic property values
3-hedonic wage values
4- avoidance expenditures
TRAVEL COST METHODS

(indirect observable method)
infers the value of a resouce by using info on how much visitors spent in getting to the site
-- this can make a demand curve for WTP for a "visitor day"

TWO TYPES:
1-number of trips visitor makes to a site

2-whether person visits and site -- and which site
number of trips to a site

(one travel cost method)
allows for travel-cost demand function

value of service flow = area under demand curve for access to site ... for all that visit site
whether ppl visit a site, and which one

(second travel cost method)
allows to determine how valuable different characteristics are

allows value of how degradation of those characteristics would lower the value of the site ... (like pollution)
HEDONIC PROPERTY VALUE

(indirect observable method)
use market data (property price) then break down price into components... like characteristics, neighborhood, enviro.

allows for measurement of marginal willingness to pay for discrete changes in attribute

use mutliple regression to get teh enviro component of the value

*ex -- all other things equal, property values lower in polluted neighborhoods*
HEDONIC WAGE VALUES

(indirect observable method)
attempt to isolate wages --- compensates workers in risky occupations for taking on the risk

uses multiple regression to find enviro component

allows for measurement of marginal WTP for discrete changes in an attribute

can construct WTP to avoid enviro risk

the compensating wage differential can be used to calculate value of statistical life
AVOIDANCE EXPENDITURE

(indirect observable method)
examines averting / defensive expenditures
--designed to reduce damage caused by pollution by taking defensive action

*ex* install air purifiers*

but ppl wouldn't usually spend more to prevent a prob thean what would be caused by problem itself
--- can provide lower-bound estimates of the damage caused
INDIRECT HYPOTHETICAL METHODS

measuring resource value
1- attribute-based methods
2- contingent ranking
ATTRIBUTE-BASED METHODS

(one indirect hypothetical method)
1-choice-based, conjoint models

2-contingent ranking
CHOICE-BASED, CONJOINT MODELS

(an attribute-based method)
good when options have multiple levels of different attributes

survey in which respondents chose between alternate states of the world ... each state of world has different attributes and a price
CONTINGENT RANKING

(as attribute-based method)
respondents given set of hypothetical situations that differ in enviro amenity available (instead of bundle of attributes)
and are asked to RANK ORDER THEM

-rankings can be compared to see trade offs between more of the enviro asset and less of other characteristics
valuing lifesaving reductions
change in probability of death from reduced enviro risk ... and place value on change

= valuing reduction in probability that pop would die earlier
"implied value of human life"
derived from value of lifesaving reductions

(WTP for reduction in probability of death) / (probability reduction)
issues in benefit estimation
decicions requiring judgement

1- primary v secondary effects
2- tangible v intangible benefits
PRIMARY V SECONDARY EFFECTS

(issue in benefit estimation)
enviro projects usually trigger primary AND secondary effects

should secondary effects be counted?

*if increase in demand results in employment of previously unused resources (labor) the value of increased employment should be counted

*if increase in demand results in shift from one resource use to another this shouldn't be counted
TANGIBLE V INTANGIBLE BENEFITS

(issue in benefit estimation)
tangible benefits: can be assigned monetary value

intangible benefits: can't be assigned monetary value

intangible benefits should be quantified to fullest extent possible
problems with cost estimation
1- B/C analysis is forward looking --- must estimate what it WILL cost... not what existing DOES cost

2- collecting cost info when the info is controlled by a firm w/ interest in the outcome
SOLUTIONS:
1-survey approach
2-engineering approach
SURVEY APPROACH

(to deal w cost prob when info controlled by firm)
ask those who bear teh costs

*ex* polluters, ask to provide cost estimates

**problem = incentive not to be truthful ... and overestimate of costs
ENGINEERING APPROACH

(to deal w cost prob when info controlled by firm)
uses general engineering info to know possible technologies that could meet the objective and estimate costs of purchasing / using those technologies
and assume sources would use least costly technology

*bypasses the source

**problem = costs of different firms may be higher or lower than the "typical" firm
COMBINED SURVEY AND ENGINEER APPROACH
survey approach :: collects info on possible technologies and circumstances of the firm

then engineering approach derives the actual cost of these technologies
treatment of risk
must 1- identify and quantify risks
2- how much risk is acceptable

*range of policy options: A, B, C, D and range of possible outcomes: E, F, G for each policy depending on how economy evolves over the future

*if you choose policy A you may end up with outcomes: AE, AF, or AG

SOLUTIONS:
-- a Dominant policy emerges
-- use the expected present value of net benefits (when no dominant policy emerges)
dominant policy
a policy that yeilds higher net benefits for every outcome

thus the existence of risk in future doesn't matter
expected present value of net benefits

(when no dominant policy occurs)
-assess the likelyhood of each possible outcome

expected present value of net benefits =
sum over outcomes of the present value of net benefits for the policy ... where each outcome weighted by probability of occuring

*appropriate if society is risk-neutral
risk-neutral
choice between being given $50 or
entering lottery with 50% change of winning $100, and 50% chance of winning nothing
(expected value = .5($100)+.5($0) = $50)

rick neutral when you are INDIFFERENT between two choices
risk-loving
choose lottery over definite $50
risk-averse
chose definite $50 over lottery
Cost of Capital
1- riskless cost of capital

2- risk premium
(depends on the riskiness of whats being considered) -- prob = value judgment
problems with C/B analysis
1- biases systematically increase / decrease net benefits ---

2- must accurately value life,
must include all potential B's and C's

3- doesn't address question of who reaps benefits and who pays cost

*B/C analysis seems to promise more than whats actually delivered
solutions to B/C problems
1- regulatory processes that can be implemented with little info

2-techniques supply useful info to the policy process w/o using techniques to monetize enviro services that are hard to value
A) cost-effective analysis
B) impact analysis
cost-effectiveness analysis
guides policy when values for C/B analysis aren't sufficient

what is the maximum acceptable level?

find threshold level below which no damage occurs

once this objective is found use "optimization procedure" ==finding the lowest cost to accomplish the objective
---doesn't always produce efficient outcome because objectives may not be efficient

(all efficient policies are cost-effective, but not all cost-effective policies are efficient)

*the least cost of achieving target is when MC of all ways to acheive it are equal*
impact analysis
when info for B/C and cost-effective analysis isn't available

attempts to quantify consequences of different actions

doesn't try to convert everything to dollars-- doesn't necessarily attempt to optimize

* puts a large amt of info at disposal of policy maker... up to policy-maker to assess importance of different consequences