Download Review for Quiz 1 2002

Review for Quiz 1
Peter Berck
2007
Env. Econ. 1
Supply and Demand
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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
3
2.5
2
S
D
D - .6
P
1.5
1
0.5
0
-0.5 0
Ps = 0.25 Q
Pd = 3 – .4 Q
2
4
6
Q
t= .6
8
10
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
?treasury outlay
Demand
Gov’t Purchases
PL
Supply
QD
QL
Deficiency Payment
Demand
PT
Deficiency
Payment
Supply
QT
2 more types
• Financial Institutions
– Land Bank
• Build Stuff
– Railroads, dams
Consumer Theory
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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
50
40
High P
Wine
30
Medium P
20
Low P
10
0
0
50
Bread
100
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
60
Price of wine
Is 2.
50
40
?Income gain from
Stamps
?Amount of food
Stamps
?Food stamps or
cash
Wine
?Price of Bread
30
20
10
0
0
10
20
Bread
30