Review for Quiz 1 Peter Berck 2007 Env. Econ. 1

Supply and Demand demand vs. quantity demanded supply vs. quantity supplied movements along vs. shifts of S & D price ceiling, price floor economic shortage/surplus market & individuals' demand curves horizontal summation specific tax tax incidence elasticity of demand and supply willingness and consumer surplus complementary vs. substitute goods normal and inferior goods

Tax example P s = 0.25 Q P d = 3 –.4 Q t=.6 D -1 (Q) – t = S -1 (Q)

Farm Programs Raise price –deficiency payments/target price program Treasury outlay Quantities produced and consumed –loan program (CCC) Treasury outlay Quantity stored –Conservation reserve, set aside, etc reduce gov’t surplus of wheat, corn, soybeans Give Away –homestead, railroad land grants

Loan rate QLQL QDQD Gov’t Purchases PLPL Demand Supply ?treasury outlay

Deficiency Payment QTQT PTPT Demand Supply Deficiency Payment

2 more types Financial Institutions –Land Bank Build Stuff –Railroads, dams

Consumer Theory consumption bundle preferences budget line indifference curve properties of indiff. curves –slope down –don't cross –"moon" shaped tangency of budget line & indiff curve normal vs. inferior goods derivation of demand curves

Demand Curve Price of Wine is 8

Exact Money Measures CV and EV and CS are all very close for marketed goods Not necessarily so for non-market goods

Valuation Revealed Preference –Travel Cost –Hedonic –Averting behavior Gives use value, not passive or non-use value

Stated Preference –Steps: background, specific problem (wolf fund, escort ships), money can be used for other things, Q: Would you vote yes or no… –Obtains passive as well as use values –Lies possible

The Point We should do things for which the benefits (from valuation study) are greater than the costs.

Pareto Improvement When at least one party to a deal is made better off and no parties are made worse off the deal is said to be Pareto improving. Examples of market trades that are pareto improving Examples of market trades that are NOT pareto improving

What Goes Wrong With Markets Reasons for –No ownership –Externalities –Public Goods –Insufficient weight on future –Government Failure

Food Stamps Price of wine Is 2. ?Price of Bread ?Income gain from Stamps ?Amount of food Stamps ?Food stamps or cash