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 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 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 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 (combines ) For example, the equilibrium catch associated with the max population of F 1 is zero, which is identified as point A on Supply function SF 1. 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 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 g 0 represents the daily volume of water that may be removed from the river. The cost of extraction is zero. Demand is represented by D 1. Under these circumstances, all the demand that exists at zero price will be satisfied. However, if Demand increases to D 2, 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 Here, the price at which quantity demanded equals fixed quantity supplied is p 0, but a price of p 1 would lead to a shortage equal to g 1 -g 0.

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.