EBF 200 RANDOM FINAL MATERIAL

unit elastic value

-1

perfectly elastic value

-infinity

Types of Barrier to Entry

-legal restrictions -licensing requirements -patents -high fixed cost vs small margins -predatory pricing -excess production capacity -bundling -brand loyalty -

perfectly inelastic value

0

List and describe the alternatives to crude oil importation

1) Efficiency This means using less of an input for a given amount of output. In the context of oil, it means using less oil for the same amount and type of transportation. This has been the primary method that has been employed since the 1970s, and is likely to be the most immediate one used in the near future. The major program that has been use is the Corporate Average Fuel Economy program, known by the acronym "CAFE". In brief, CAFE led to the increase in the average fuel economy of passenger cars from about 14 miles per gallon in 1974 to about 27 MPG by 1985. After several years at the same level, new standards were announced in 2010, with the intent of raising the fuel economy to 34 MPG by 2016. Also, for the first time, trucks, buses and other heavy equipment will be subject to fuel economy rules. You can read all about the proposed rule at the National Highway Traffic Safety Administration CAFE web-page (this is for your information only, not required reading). 2) Conservation This is not the same as efficiency, which means using less fuel for the same amount and type of transportation. Instead, this means consuming less transportation or changing the mode of transportation. It can have several manifestations: Walking instead of driving. Bicycling instead of driving. Car-pooling instead of driving alone. Tele-commuting instead of physical commuting. Web-conferencing instead of travelling to meetings. Vacationing close to home instead of flying to Europe or Asia or Hawaii. Consuming only locally-produced goods (that do not have to be transported long distances). Consuming virtual goods (books, music, movies, education(?!?)) over the computer, instead of traveling to purchase physical alternatives. Moving closer to work/school/shopping. Mass transit- buses, rail, ferries, etc. Many of these involve substituting travel with non-travel. If we assume that a person derives positive utility from traveling, then replacing travel with non-travel will necessarily result in a reduction of wealth, with the possible exception of the replacement of physical consumption with virtual, electronic consumption. Needless to say, it is difficult to get people to willingly perform actions that will make them less wealthy. 3) Natural Gas This is perhaps the most obvious alternative. Natural gas is already used in millions of vehicles in South America and Asia. It does not require any major technical alterations to the engines that are currently used to burn gasoline. Another advantage of natural gas is that there are large volumes of it available at very low prices in the US - currently, crude oil costs about three times as much as natural gas in the US on an energy basis, that is, $/Btu of heating energy. The oil investor T. Boone Pickens is currently pushing a plan to convert much of the US vehicle fleet to natural gas, and use wind energy to generate electricity. His plan is outlined at the following link: http://www.pickensplan.com/the-plan/ So, the question arises: natural gas is cheap, abundant, domestic, technically feasible and in use in many other parts of the world. Why aren't we using it? A couple of hurdles: natural gas vehicles either have to have large tanks or short range, and there is not a large infrastructure for refueling. There is also a belief that natural gas vehicles have less performance than equivalent gasoline-fueled vehicles. There are several instance where these issues are not important. For example, all of the buses that run in State College are fueled by compressed natural gas. Taxi fleets, UPS trucks, garbage trucks and school buses are other applications that have seen significant natural gas penetration. The biggest obstacle that people cite is the cost of converting an existing vehicle to natural gas, which is currently on the order of $1,500-$2,500 per car. The following website is that of the Natural Gas Vehicle Coalition, which is a lobbying group for the adoption of natural gas-fueled vehicles. If you are interested in this issue, there is some good information here, although you should be aware that this website is giving you only one side of the story - that of the boosters of natural gas for vehicles. A slightly more balanced overview can be found here: Harris, William. "How Natural-gas Vehicles Work", How Stuff Works. An update: April 6, 2011 saw the introduction of the NAT GAS Act, which is an acronym for The New Alternative Transportation to Give Americans Solutions Act. As you can see, it is very important in today's Washington that every new act have either a catchy name or a cute acronym. No matter. This is an act that largely follows the recommendations of the Pickens Plan, as mentioned above, with the goal of putting something like 250,000 natural gas fueled commercial vehicles on the road, and reducing the amount of diesel fuel (and, by extension, imported crude oil) burned every day. This bill contains a variety of tax incentives designed to grow the tiny natural gas fleet. I should note that the immediate aims are quite modest - currently, natural gas vehicles use about the equivalent of 25,000 barrels of oil per day, or about 0.12% of the oil consumed in the country. This bill would increase that number by 4 or 5 fold, that is, displacing about half a percent of oil consumption. A brief summary can be found here. 4) Electricity Replacing gasoline with electricity has two major components: battery-powered vehicles, and long-distance rail powered by electric power-lines. We are seeing a bit of a boom in electric vehicles at this moment, with about 11 different models available now or in the near future, as listed at the following Department of Energy's web page, New & Upcoming Electric Vehicles: Since almost all electricity is generated by domestically sourced coal, natural gas or hydroelectricity, or by uranium that is imported from friendly and non-threatening nations like Canada and Australia, this type of vehicle has the capability to drastically reduce oil imports. There are several reasons why the widespread adoption of electric vehicles may be a bit far out into the future. The first is range: many of these vehicles have a range of less than 100 miles, and will take several hours to recharge. Thus, they will be impractical for long-distance travel. Government data indicate that over 90% of the vehicle trips taken are less than 40 mile round trips, so much of our driving could be replaced by electrics, but people would still need another vehicle for whenever they wanted to drive more than 100 miles in one day. Another issue is cost: an electric vehicle is currently about $10,000 more than a corresponding gasoline-powered vehicle, and the pay back period extends beyond the life of many cars. The availability of sufficient lithium and problems with battery life are other issues that are yet to be fully surmounted. Nonetheless, as I mentioned above, we are currently in a bit of a boom for this market segment. It remains to be seen whether this boom sticks, or whether it will pass shortly. 5) Biofuels and Biogases Biofuels Instead of digging our fuel up from the ground, why do we not grow it from the ground? Ethanol, which is created by fermenting a biomass such as corn or sugar cane, and biodiesel, which is made from soybeans, are two types of biologically-sourced fuels that are currently in use in the US. While biofuels are also basically 100% domestic there are a couple of large issues that may hamper their broad-scale adoption. Firstly, the process of tilling, seeding, fertilizing, harvesting, transporting, processing, fermenting and distilling ethanol is very energy intensive - by some measure, it requires more energy than is obtained from the ethanol. This means that the production of ethanol actually consumes more energy than it generates, and much of that energy is necessarily imported crude oil. The second issue is that corn and soybeans used to make biofuels are corn and soybeans that are not used to make food products. As such, it has effects on the price and availability of food. The following are a couple of short magazine articles that address this issue. Please take the time to read them. "Food Vs. Fuel: Growing Grain for Food Is More Energy Efficient", ScienceDaily, Science News (Apr. 20, 2010). "Food vs. Fuel", Bloomberg Businessweek, February 4, 2007. Biogases Methane derived from the anaerobic decomposition of organic materials. Landfills, wastewater treatment plants, and animal farms (manure) all have the opportunity to capture and utilize this naturally occurring methane. While much of the methane currently captured is being used to power electrical generators, increasingly the biogas is finding applications in the transportation sector. Some large waste-hauling firms such as Waste Management are powering garbage trucks with methane collected at the landfill. In these types of applications, the biogas resembles Natural Gas (see above), and has many of the same benefits and hurdles- conversion costs and distance constraints, for example. Conclusion

4 steps of the scientific method

1. observe 2.hypothesize 3. test 4. repeat step 1

Consumer Surplus.

A consumer's net gain of wealth in a trade = maximum amount willing to pay - purchase price. (Remember, the maximum willingness to pay is the marginal utility obtained from consuming the good. A rational person will not pay more than the value he gets from the good.) Because we assume the law of one price, all consumers pay the same price, which happens to be the equilibrium price, P*. Add this up for all buyers, and we have the total wealth created by the market for consumers.

As I said in the previous lesson, there is a very limited set of reasons why monopolies can persist. These are:

A monopoly has government protection. A monopoly involves having total control over a limited-supply good. A natural monopoly exists, where it is economically efficient to have only one seller.

why is a monopoly bad

A monopoly leads to the following: A lower quantity of goods produced and consumed than in a competitive market. A higher price than the equilibrium price in a competitive market. A higher profit for the firm. In a monopoly, a firm will typically make greater than zero economic profit (remember that term?). monopolies often result in a deadweight loss or social loss

Producer Surplus (PS)

A producer's net gain of wealth in a trade for a single good = purchase price - minimum willingness to accept. This is the same as "equilibrium price minus marginal cost." To get the total profit generated from all goods sold in the market, add the "net gain" up for all goods from sellers, and we have the total wealth created by the market for producers.

Understand the reasons why the resource curse can occur

Dutch Disease Effects The term "Dutch disease" describes a phenomenon by which the abundance of natural resources in a country becomes in a disadvantage instead of being something from which the country could benefit through the commerce. The mechanism by which Dutch disease is manifested is through international trade. It begins with the abundant natural resources extraction, then is continued in the export of those resources and ends in the inflow of foreign exchange as result of the sale of those natural resources. The term arises from what happened to the economy in the Netherlands after large amounts of natural gas was produced in that country in the late 1960s and early 1970s. According to World Bank authors, Dutch disease results where, "In places where natural resources are abundant—that is, where they can be produced at low cost, relative to the marginal cost of production elsewhere—they generate large profits (economic rents) for the owners. This has two major effects on the relative incentive structure in the economy. First, to the extent the resources are exported, the inflow of foreign exchange appreciates the real exchange rate: that is, it raises the price of non-tradable goods relative to that of tradable goods. Second, it increases the returns to production of the resource relative to other tradable goods. Both of these effects reduce the incentive to invest in production of other tradable goods, resulting in a production and export structure concentrated in the resource. (Sinnott, Nash, & De la Torre, 2010) For an example, assume that a country finds it has a lot of mineral wealth - say silver. The silver is mined, and then sold for dollars in the international market. The dollars come into the country and are then converted into the local currency. This raises the value of the local currency with respect to world markets, making wages and local raw material increase in price conducting higher costs for local producers. This drives people out of potentially useful areas, often in the agricultural sector. In the 1960s, natural gas was found off the coast of the Netherlands. This led to rise in the value of the Dutch currency, making Dutch manufacturing less competitive and harming the Dutch manufacturing sector. A solution could be for a country to give up its domestic currency, like Panama switching to dollars as its currency. However, the drawbacks from such a move could be serious, as what happened in Greece in 2013 after it switched to using the Euro as its currency. Political Authorities and Institutional issues The resource curse may cause the capture of political institutions for ends and interests of those who are active or are located near natural resources. This means that the resource curse affects political institutions, making them serve special interests, reducing their ability to control and supervise economic activity. The political authorities often collude with private companies to develop projects with the income that comes from the exploitation of natural resources. While these projects may have social purposes, many irregularities often occur. For example, projects are developed with large budgets, equipment is bought with prices above the market, estimated costs increase during the development stage of the project. All these overstatements are ways by which the authorities and private companies receive private benefits from resource extraction. This behavior leads to what economists call "rent seeking". This means that there are civil groups, private companies or authorities, which receive income from resources, looking for getting revenues, rents or some money without providing or developing some productive activity. Recent research shows a direct relationship between the abundance of resources and poorly run governments, poor and weak institutions or administrations led astray by special interests. This is a direct consequence of the behavior of the authorities. The authorities direct their efforts and attention to seeking to stay in power. To remain in power, the authorities use the resources at its disposal looking to catch and supply the needs of their constituents. The regime could also develop economic activities in order to create jobs and distribute them among their potential electors. The result may ultimately be a struggle between the most advantaged and disadvantaged groups, and social unrest.

externality

Externalities can be either positive or negative, that is, the economic activity of one person or group can have either a positive or negative "spill-over" onto other people. An externality is when the welfare (utility) of a person depends not only on his activities, but also on the activities of an "outside" person. This occurs when property rights are NOT well-defined.

Describe and explain several of the contentious issues surrounding climate change.

I will now attempt to list and briefly describe some of the the major points of controversy in the climate change discussion. Anthropogenicity Some people, some of them credible and sensible, believe that the anthropogenic nature of global warming may be overstated. That is, it could be that the planet is warming for reasons other than human activity, or that the degree of warming may be misunderstood. Measuring global temperature is complicated, and the data can be difficult to interpret. Also unknown are the scales and contents of certain feedback mechanisms. How will clouds affect climate change? Will we reach a steady state above which we will never see any more warming? Is sunspot activity a factor in climate change (other planets have shown recent temperature changes.) What if we drastically reduced carbon emissions, with a detrimental effect on human economic development and human welfare, but climate change continued unabated? All of these issues are difficult to assess. Benefits versus Costs Defining the sizes of the costs and benefits from emitting carbon is extremely difficult. This is complicated by the fact that the beneficiaries and the victims often live in different places, and perhaps exist at different places in time. Thus, calculating the socially optimal amount of carbon emissions for each different country is very difficult. Thus, policy design is complicated, and we have the ever-present free-rider problem, whereby some countries, especially small ones, may feel that they can cheat on carbon with impunity to benefit their domestic industries and people at the expense of others. Uncertainty of Effects This is basically a reiteration of the above point: we are unsure of the future scale of effects from an increase in anthropogenic carbon dioxide. How much will temperature rise? What kind of feedback loops exist? There are a number of feedback mechanisms that have been talked about. For example, the Gulf Stream is an ocean current that carries warm water from the Caribbean to the North Atlantic. The result of this is that western Europe is quite a bit warmer than most other parts of the planet that are at similar latitudes (for example, London is about 750 miles further north than New York, but both have similar climates, especially in the winter.) The Gulf Stream is driven by salinity gradients in the North Atlantic, but if a lot of fresh icecap water melts, the salinity gradient will be weakened, and this may cause the Gulf Stream to stop flowing, making northern Europe much colder. Another possible mechanism is that there is a lot of methane trapped in the permafrost of the frozen tundra of northern Canada and Siberia. If the permafrost melts, this methane will go into the environment, and methane is abut 20 times more effective than CO2 at trapping heat in the troposphere. Thus, if the tundra melts, it will cause the greenhouse gas to accelerate, raising temperatures even more, and so on. These feedback loops are poorly understood. There are other ones that could work in the opposite direction. For example. warmer air means more moisture suspended in the atmosphere. Water vapor is a powerful greenhouse gas, but in the form of clouds, it is effective at blocking radiation and reflecting it back out into space before it reaches the ground. Which effect would dominate? That is a question that is currently under investigation. Our knowledge of the potential effects of higher concentrations of greenhouse gases is unknown. Some people will say that in the face of uncertainty, we should adopt the "precautionary principle." This notion is explained in a bit more depth at this website: Science and Environmental Health Network. The basic idea is that if we don't know how much harm some practice will do, maybe we should hold off on that practice until we have more information. There has been a lot of vigorous debate about this topic, with many arguing that if it had been applied in the past, much of the technological progress that has led to drastic improvements in quality of life over the past 200 years would have not occurred. The precautionary principle essentially puts the burden of proof on somebody who wishes to implement an new technology - they have to show reasonable proof that this technology will not cause excessive harm. In a scientific context, it is difficult to prove a negative. A critique of the precautionary principle can be found here The Heritage Foundation. Some more debate on the critiques of the precautionary principle can be found at this website: Debating the Precautionary Principle. Tax versus Cap-and-Trade There is a current mood against cap-and-trade, despite its success in combating acid rain in the US and the operating of a European GHG cap-and-trade market. Some people believe that such a market is overly complicated, will be easily gamed, and will result in windfall profits accruing to certain firms and industries. Tax opponents claim that using a tax is an indirect approach that is fraught with potential error, as it requires knowledge of the shape and form of the demand curve, something that is almost impossible to know. Tax supporters say that at least a tax will give price stability, and that a cap-and-trade market can lead to great price volatility, making business and tax planning very difficult. Allocation of Permits - Domestically and Internationally At the current point in time, it appears unlikely that we will any sort of binding global agreement on carbon abatement, or an international permit trading system. However, if we do embark upon some sort of global cap-and-trade policy, how will the permits be allocated? How many will each country be able to issue, and how much will each country charge? Will they give them out for free, or will they sell them all, or some combination? Europe has had a carbon trading regime in place for several years, and in its early phases, it was largely ineffective. One of the reasons for this is that each country in Europe got to decide how many permits will be issued to firms within that country. Thus, every country has an incentive to issue more permits to firms within its borders, while arguing that "somebody else" should be issued less. In the absence of any sort of superior governmental authority, this problem is difficult to overcome. When nations disagree, and one nation attempts to force another nation to change policies, compliance mechanisms typically involve trade sanctions, followed by military action. I do not believe that carbon permit allocations are anything that anybody wants to start a trade war (let alone an actual war) over. I should note that this permit allocation problem in the European Union has been largely overcome in recent years by fine-tuning the allocation process. Abatement versus Adaptation In some respects, it may make economic sense to simply let global warming happen and deal with the consequences. That is, adapting to the consequences of climate change may be a cheaper option than trying to prevent climate change. In reality, we will likely see some combination of abatement and adaptation, but adaptation is difficult to apply in an equal fashion across the globe. International Implementation How can all countries be forced to implement policies addressing climate change? How do we punish free-riders? How do we tell developing countries that they are not free to use fossil fuels to build industrial economies in the way that we in the west have done over the past 200 years. Revenue Recycling If we auction off permits, where does the revenue from these permits go? Towards clean technology development? To the reduction of income and capital investment taxes? To compensate the victims of climate change? To State governments, to dole out as political pork? Intergenerational Equity and Discounting Why should we make ourselves poorer today to benefit people who will be born 100 years from now, when they are likely to have better technology to deal with a warmer world? Conversely, how can we perform "bad behavior" that will inevitably make the world a worse place for future generations to live in? How can we perform cost-benefit calculations that have time-dependence built in (that is, near-term effects are valued higher than far-term effects?) For me, a dollar twenty years from now has less value than a dollar today, and a dollar earned 100 years from now has zero value to me. However, to somebody who is 25 years old in 100 years, the relative utilities of those dollars would be very different. Geo-Engineering It is likely that we will see some global-scale technology efforts aimed at attacking climate change. One example involves putting large mirrors in space to reduce the amount of solar radiation reaching the earth. Another is seeding the oceans with iron oxides in order to increase their capacity to store carbon. Yet another is carbon capture and sequestration, which involves storing carbon deep in the earth. All of these things are expensive, and all of them have potential adverse, unintended consequences that may cause more damage than good. How do we address these things on a global scale? Indeed, climate change is intrinsically a global issue, and we do not have a single global human institution with the power, money and authority to act upon climate change. Many of the controversies mentioned above have a common theme: uncertainty. As of right now, we have great difficulty quantifying the effects and timing and location and costs of climate change, and, as such, it is difficult to reach any sort of meaningful consensus that we should do something, or anything. Thus, it is no longer an economic problem, but a political problem.

Draw a diagram showing the private and socially optimal equilibria, and the private and social cost functions.

In the above diagram, we have the "private" equilibrium, which is the intersection of P1 and Q1, and we have the "social" equilibrium, which is the intersection of P2 and Q2. The difference between these two equilibria comes from the upward shift of the supply curve when we include the social costs, which are costs that are paid by society in general, or by people "external" to the transaction, versus the private supply curve, which is the one that contains all the private costs. I may be over-simplifying things here, but, basically, the entire field of environmental economics is concerned with trying to shift the equilibrium from the private one, (Q1, P1), to what we call the "socially optimal" equilibrium, (Q2, P2). This is often referred to as "internalizing" an externality.

inputs of production

Labor (L): simply put, people. Materials (M): physical things that get used up to make products. Energy (E): electricity, petrol, and so on. Capital (K): machines and buildings (and may also include land). Does not get "used up" in production

Describe some policy instruments that are available to reduce carbon emissions.

Many aspects of the global warming debate are controversial, meaning that there is an amount of disagreement that is sufficient to make reaching consensus or compromise difficult. That the planet is warming is now widely accepted, but the causes, risks, and mechanisms are hotly debated. At the end of the day, devising and implementing economic instruments to address climate change is a political decision, which means it is largely beyond the scope of discussion in this forum - economists seem to have a habit of getting themselves in hot water when they venture into the field of politics. All I can do here is spell out the framework of some of the current disagreements and controversies. What is notable is the change that has occurred in the United States over the last ten years. The Kyoto Protocol (for more background on the Kyoto Protocol see the following web pages: United Nations Framework Convention on Climate Change or Wikipedia: Kyoto Protocol) was the first attempt to reach a global agreement on carbon reduction. Any action concerning ratification of the Kyoto treaty was voted down 95-0 in the US Senate in 1997. However, 12 years later, in 2009, a bill was passed through the House of Representatives, containing greenhouse gas (GHG) standards on vehicles and implementing a carbon cap and trade policy for large stationary emitters. This was called the Waxman-Markey bill (officially titled the American Clean Energy and Security Act). This bill proved to be very unpopular with some parts of the American populace, and, as such, an accompanying bill was never introduced in the Senate, and it is unlikely that one will be before this session of Congress ends in 2012. With a number of newly-elected representatives having campaigned against any bill containing a cap-and-trade provision, it is unlikely we will see another bill introduced before 2013. However, as I mentioned above, there has been a large change since 1997. Furthermore, the Environmental Protection Agency has been granted, by the Supreme Court, the responsibility of reducing carbon emissions using provisions contained in the Clean Air Act, and the EPA is currently developing policy and guidelines for the control of carbon from emitters. Additionally in the United States, a number of state and regional cap and trade programs have been, or are being, implemented. In the northeast, 10 states (New Jersey's Governor announced New Jersey's withdrawal recently, so starting in 2012, 9 states) have been participating in the Regional Greenhouse Gas Initiative (RGGI) since the program's beginning in 2009. The program provides for a cap on carbon emissions from electrical generation facilities in the 10 states which decreases over time. In California, a cap and trade program is scheduled to begin trading allowances in 2012, with an emissions cap on electrical generation facilities beginning January 1, 2013. Other states and some Canadian provinces are considering joining California to form a regional program called the Western Climate Initiative (WCI). Therefore, it is unlikely that this issue is going to go away. Regardless of where you stand on the political spectrum, this is an issue that you will have to address over the next 30 or 40 years. It is not going to go away because of one election.

Let's say there are two choices of investment in firms in the same industry. In this industry, the risk-free return is 5% and the risk premium is 5%: Buy stock in company A for $100 per share and earn $10 per year in profit. Buy stock in company B for $60 per share and earn $9 per year in profit.

The profit on investment B is 15%, but in company A it is 10%. So the economic profit from owning B will be 5%. But, because of this, everybody will want to buy B. When the demand for a good increases, the price goes up, and in this case, the price will go up until the percent profit is the same as company A. The economic profit will be driven towards zero.

Draw, label and explain the key components of a supply and demand diagram for electricity.

check electricity value plan on computer

why does the demand curve slope downwards

declining marginal utility

cross elasticity of demand

eta(XY) = % delta Q(X)/% delta P(Y) where X and Y are subscripts denoting the two goods in question. -substitute goods have a positive cross elasticity -complements have a negative cross elasticity of demand

inelastic value

greater than -1

Risk-free return (RFR)

is the profit you can make from an investment that has absolutely NO uncertainty.

some examples of externalities

negative externalities-air pollution, water pollution, noise positive externalities- bees pollinate crops even know they are primarily used for honey

causes of shifts in the supply curve

shift to the right is a result in lowering a cost of production shift to the left is the result of a disturbance in the market such as a natural disaster

necessity elasticity

these are very inelastic

Understand the two features of natural resources that make them different from other economic goods

they are only around once it is only in certain locations

where do monopolies set price and quantity

they often set price and quantity where mr=mc

4 aspects of perfect competition

1.nobody has market power 2.perfect information 3.product homogeneity 4.free entry and exit

7 fundamental principles of microeconomics

1.people face tradeoffs 2.the cost of something is what you give up to have it 3.rational people think at the margin 4.people respond to incentives 5.trade can make everyone better off 6.markets are usually a good way to organize economic activity 7.governments can sometimes improve market outcomes

causes of shifts in the demand curve

1.population 2.income 3.the price of other goods 4.expectations 5.taste (trends) 6.information

List and describe various environmental regulations affecting the coal-fired electricity generation sector

Environmental Regulations Affecting Coal The Clean Air Transport Rule This is a regulation, which was released in July 2010, that sets new limits on SO2 and NOx emissions. Please read this presentation from the EPA summarizing the new Air Transport Rule. We spoke earlier in the course about the permit trading program that was enacted by the Clean Air Act Amendments of 1990, which was very successful in reducing the amount of these pollutants emitted by power plants. It was felt by many in the environmental field that the benefits of this program had hit a plateau, and for further reduction in emissions and improvements in air quality to occur, a newer, more stringent rule would be required. This is that rule. It limits the market for permit trading to within states, and not between states, meaning that plants within a state would have to collectively meet some firm emissions caps, and not buy permits from other generators out of state. There will also be fewer permits issued than under the old program. Coal Ash Rule As mentioned above, coal combustion generates a lot of solid waste, in the form of ash, that must be disposed of. Much of this ash is held in liquid form in holding ponds before final disposal, often in dedicated landfills, or in old coal mines, or as a component of cement. In December of 2008, a retaining wall in a holding pond at a TVA power plant in Kingston, Tennessee failed. Over a billion gallons of liquid ash spilt into a river and flooded over 300 acres of neighboring land. A good summary of the incident can be found at this Wikipedia page. In the wake of this event, the EPA decided to issue a rule concerning the handling and disposal of coal ash. In 2010, they released a proposed rule with two possible paths of action - either the ash will be classified as a hazardous waste, which would make it subject to stringent, and extremely expensive disposal procedures or a less strict interpretation of the rule would classify the ash as a special waste, which would be much less expensive to deal with. The final form of the rule is yet to be announced, but it is likely that it will be the less stringent interpretation of the two. The EPA has put together a PowerPoint presentation with a summary description of the proposed Coal Ash Rule. Please read this presentation. Toxics Rule In the Clean Air Act Amendments of 1990, two general classes of pollutants were created. One classification is that of "criteria pollutants". This is a list of six pollutants that are allowed at certain concentrations. These are: Ozone Particulate matter Carbon monoxide Oxides of nitrogen Sulfur dioxide Lead These are pollutants which have an accepted allowable background concentration. It is not technically or economically feasible to attempt to eliminate all traces of these pollutants from the environment, but, instead, we seek to control them to an acceptable, albeit low, level. The general standard mechanism for attacking these pollutants is what is called "best available control technology", or BACT, which allows some consideration of economics into the definition of "best". More on these at this EPA page. The other set of pollutants are what are known as Hazardous Air Pollutants, or HAPs. This is a specific list of 187 chemical compounds, sometimes known simply as "toxics". Here is the EPA site on this issue. For these compounds, the law prescribes the use of "maximum available control technology", or MACT. This is sort of a zero-tolerance approach, meaning that emitters of these chemicals must use the most effective method of reducing the emissions, without consideration to the cost. For coal-burning power plants, the most important toxic pollutant is mercury. In April 2011, the EPA released a new toxics rule for coal-burning power plants. The EPA has not yet released a simple summary of the rule, but a good summary has been put out by the Natural Resources Defense Council, here. Please read. Clean Water Act Rules Coal-fired power-plants burn the coal to boil water. The steam then drives turbines, which are connected to electricity generators not unlike the alternator in your car (except in scale!) The steam is then recycled back to the boiler, but in order to be pumped back to the boiler, it has to be condensed to liquid water, so as not to damage the water pumps. For this, power plants generally use rivers or streams as sources of cooling water. In the process of sucking hundreds of thousands of gallons per hour into the plants, a lot of fish get killed, either by impinging on the filter screens on the water intakes, or by being sucked through the screens and sent through the heat exchangers. Furthermore, the warming of rivers and streams by discharged power-plant cooling water can cause serious distress to marine life by upsetting their natural habitat. In order to minimize the negative effects on marine life, the EPA is in the process of issuing rules under the authority of the Clean Water Act. The proposed rule is here. Please read. Carbon Rules In 2007, several states sued the EPA, demanding that the EPA regulate emissions of carbon dioxide under the authority of the Clean Air Act. This case went to the Supreme Court, which found for the states. Therefore, the Supreme Court of the United States ordered the EPA to issue regulations concerning the emissions of carbon dioxide, both from stationary sources (power plants, steel mills, and so on) and mobile sources - cars and trucks. A summary of the case can be found at Wikipedia, here. I should make it clear that the EPA did not, and does not want to regulate carbon under the Clean Air Act. This is not the appropriate law; it was not written with carbon in mind, and using it as a pathway to carbon regulation would be extremely burdensome on society. The EPA would like Congress to create a law written specifically for the purpose of addressing carbon emissions and their role in climate change. The House of Representatives passed such a law, the Waxman-Markey Bill in 2009, but many of the people who voted for this law were defeated in the 2010 mid-term elections, and it was never brought to the Senate for a vote. The bill died with the previous session of Congress. It is highly unlikely that Congress will address this issue any time in the foreseeable future. In the meantime, the EPA is attempting to follow the orders of the Supreme Court and regulate carbon emissions under the auspices of the Clean Air Act. Once again, the clearest summary of the EPA rules can be found at the NRDC. I will warn you that the NRDC is an unapologetic pro-environment group, and their writings will be in clear support of these environmental regulations. There are plenty of other public-policy advocacy organizations that take a different view, such as the Heritage Foundation, the American Enterprise Institute and the Cato Foundation. I do not wish to present any particular political point of view - I am an economist, not a political analyst - I only wish to give you the clearest explanation of these often cumbersome and legalistic rules, and that is often found at the NRDC site. So, we have five current or proposed rules that will affect the operation of coal-fired power plants: The Air Transport Rule. The Coal Ash Rule. The Toxics Rule. The Clean Water Act impingement rule. The Carbon Rule.

Explain what a generation stack is.

In a competitive market, each generator enters bids for how much of its output power it wants to sell at what price. That is, each generator gives an individual supply curve to the system operator. The system operator is a quasi-governmental non-profit firm that is responsible for collecting all of the bids, arranging them in ascending order of price, and then figuring out which power plants shall be turned on, and when. This is done on a "day-ahead" basis, where generators enter their bids for tomorrow and, after a few hours of computer runs, are told if and when they will be expected to turn on the next day. When we add together each individual supply curve, we are left with an aggregate supply curve that is called a "generation stack" - literally, all of the generators are "stacked up" in ascending order of marginal cost, and only the lowest cost ones necessary to meet expected demand will be turned on the next day.

Describe what a price cap is and graph it on a supply and demand diagram.

In this diagram, we have a price cap, PC, which is a horizontal line below the equilibrium price, P*. The quantity demanded, Q(d), is the amount at which the price cap and the demand curve intersect. The quantity supplied, Q(s), is where the price cap and the supply curve intersect. From the diagram, you can see that Q(d) is greater than Q(s). That is, we have more people who want to buy than we have people who are willing to sell. This should be obvious - if the price is lowered, more people will want to buy. So, in this market, the supply is unable to meet the demand. So there is a "Shortage" of the good in question. Only some of the demanders get to buy, but they do get to pay a lower price. We have a new equilibrium, which is defined by (PC, Q(s)), which is at a lower price and quantity than the free-market equilibrium, (P*, Q*)

different markets

Monopoly: only 1 seller. Duopoly: 2 sellers. Oligopoly: a few sellers. Monopsony: only 1 buyer.

Describe what a price floor is and graph it on a supply and demand diagram.

Much like price caps, this form of price control often serves to hurt the people it is seeking to help. Let's look at a supply-demand diagram. In this case, the government sets a minimum price that is ABOVE the free-market equilibrium price. Note: if the price floor is below P*, it will not make any difference to the market. It will be "non-binding". A price floor must be higher than P* in order for it to have any effect. Now, in this case, the quantity demanded, Q(d), is lower than the quantity supplied, Q(s). We have more people who want to sell than we do people who want to buy. The new equilibrium is given by (PF, Q(d)). This is the opposite of the price cap: that gave us unsatisfied demand, which we called a shortage. In this case, we have an unsold supply, which is called a "glut".

Draw a matrix defining public and private goods, and common pools and club goods.

RIVAL GOOD NON-RIVAL GOOD excluable private good club good non-excludable good common pools public goods

Describe what we mean by "rent-seeking" behavior.

Rent seeking is a way of transferring previously-existing wealth to oneself by something other than voluntary trade. It typically involves a transfer of wealth, not a creation of wealth like that which occurs in a market with voluntary trade driven by utility and profit maximization Now, putting aside the notion of simple theft, which is, in theory, opposed by governments, let us start to look at forms of rent-seeking that arise out of the seeking of favors from government. OK, so now we are talking about government power. Government has the power to pass laws, to write regulations, to collect taxes and to enforce the laws, regulations and taxes. Because members of government have lots of power, they have lots of favors to dole out, and it is the competition for these favors that forms the basis of rent-seeking. Firms are competing with each other, but instead of competing for customers by offering better products or better service at lower prices, they are competing for government favors. Instead of employing salesmen or engineers or factory workers, they are employing lawyers and lobbyists.

Define and explain "rational ignorance"

So, when we vote, economic theory suggests we pick the candidate who will improve our welfare. But in some sense, it can be very difficult to tell just who is the best candidate. Individuals have little incentive to seek the necessary and costly information on politicians and policy to determine which candidate will most likely improve our welfare. Thus, voters are rationally ignorant; they are not properly informed on all the issues and candidates. We say rationally ignorant because your equilibrium behavior is to be uninformed. The cost of discovering all you need to know about all of your electoral options is greater than the benefit of doing so - it is actually rational to be ignorant! (by ignorant, we mean "not in possession of all possible information").

Economies of Scale

Sometimes we want to make our businesses bigger. When you do this, you do not add just people, or just machinery, you add all factors. But how much should we add? The question is: Do we benefit from getting bigger?: If increasing inputs by x% increases output by > x%, we have what are called "increasing returns to scale." If increasing input factors by x% increases output by exactly x%, we have constant returns to scale. If increasing input factors by x% increases output by less than x%, we have decreasing returns to scale. Firms generally try to be as big as possible without entering the phase of decreasing returns to scale

factors of the production short run and long run

Summarizing: In the short term, capital is assumed to be constant, all other factors are variable. In the long term, all factors are assumed to be variable. In other words, the difference between "short-term" and "long-term" is the time required to change a firm's capital.

Explain the strategies that can be adopted to reduce carbon emissions.

Strategies for Reducing Output Other-fossil fuel substitution: As can be seen from the above intensity data, natural gas puts out less CO2 per ton than other fossil fuels. Thus, switching to gas from oil and coal is one way to reduce carbon emissions. Non-fossil fuel substitution: We can replace carbon-creating energy sources with carbon-free ones. Alternatives include hydroelectic power (dams), nuclear power, wind, solar, geothermal, and tidal energy. Recently, methane emissions captured from agriculture, landfills, and coal mines are also being utilized. Note that most of these are for electricity-generating purposes and do not address transport fuel needs. Carbon-neutral fuels: This is another way of talking about what are called bio-fuels: fuels made from plants. As the carbon that forms part of the plant came from the environment, burning plants is what is called "carbon-neutral" - we are simply cycling the carbon from the air to the plants to the combustion process, which puts the carbon back in the air, and so on. Energy efficiency: We can choose to use less energy in our daily lives. This can be thought of as a type of factor substitution - when looking at factors of production, we can sometimes substitute one for another. For example, if I add insulation to my house, I am substituting capital for energy. If I purchase a smaller car that gets better mileage, I am investing in more capital in order to reduce my consumption of energy. This is likely to be one of the largest sources of carbon reduction. Conservation: This is a bit like energy efficiency, but it means that instead of employing more energy-efficient capital, I simply perform less of the actions that consume energy. This could mean driving less - maybe I will go on driving vacations less frequently, or maybe walk to work. Maybe it means that I go without air conditioning in the summer by raising my thermostat, or using less heat in the winter by wearing a sweater inside. Carbon capture and sequestration: This involves capturing the carbon before it gets into the environment and storing it in the earth. A brief description is given in the following link by the National Energy Technology Laboratory, a part ofthe US Department of Energy, "Carbon Sequestration: FAQ Information Portal" and "Carbon Capture and Storage Database". We will examine the costs of some of these strategies in next week's lesson.

Explain how bureaucracies are self-interested, and what this results in.

The bureaucracy will maximize its own welfare. Bureaucracies are composed of individuals. These individuals act in their own best interests — not society's. This results in very expensive bureaucracies that cost more than they should

expected and economic profit

The expected profit from an investment is the risk-free return (RFR) plus the appropriate risk premium (RP) for the industry in question. So, the accounting profit (TR - TC) should be equal to (RFR + RP). If the profits are greater than (RFR + RP) then we say that an investment is making an Economic Profit.

Describe the electricity "value chain".

There are several steps involved in getting electricity to the end user. It is typically broken up into four steps, as follows: Primary energy acquisition. Generation. Transmission. Distribution.

Explain why it is difficult to eliminate rent-seeking behavior.

There are several ways to try to deal with the problem of rent-seeking. Out-and-out bribery is illegal (Federal employees cannot even accept free lunch at McDonalds), but making political donations, or paying for senators to take trips to Hawaii to "present a briefing" to them is not illegal. There are technocratic solutions, such as establishing objective (rather than subjective) criteria for large contracts. Also, the press will gladly expose any scandal they can uncover in lieu of these rules. However, there is a basic problem that means that rent-seeking is not likely to go away anytime soon: politicians and bureaucrats have power, and as long as they have power, and exercise it, then people will compete with each other for the benefits derived from the exercise of this power. The only solution to this is to reduce the amount of power that resides in the hands of government - something that nobody in government has any incentive to do.

price elasticity of demand

defined as the percentage change in quantity divided by the percentage change in price. For example, if the price of a bag of Doritos rises from 99 cents to $1.29, then the percent price change will be [(1.29 - 0.99)/0.99] x 100% = 0.3/0.99 x 100% = 0.303 x 100% = 30.3%

income elasticity of demand.

eta(I) = % delta Q/% delta I where "I" is the symbol for income. Goods that have positive income elasticities are usually referred to as "normal" goods by economists. Luxury cars have positive income elasticities. -inferior goods have negative income elasticities

Explain why bureaucracies exist.

the government (either Congress or the President) is assigned (or assumes) the property rights for the said resources and programs, and then chooses to "contract out" the work to an agency working, nominally, for the politicians. This is like hiring a maid to clean your house, or a gardener to mow your lawn, except the government hires large numbers of economists, accountants, engineers, scientists, lawyers and administrators to perform the management, execution and enforcement of the rules that the politicians put into place. So, for example, the politicians will pass a law like the Clean Air Act, with a bunch of goals and targets for cleaning up the environment, and will then delegate to an agency (in this case, the EPA) the job of making sure that the law is put into effect. Bureaucracies carry out valuable programs for which society is willing to pay.

equimarginal principle

which merely states that in an efficient firm with sufficient information, factors of production will be employed in some optimal mix such that the marginal return to each one is equal, and as close to 1 as possible. If one factor has a higher return, it makes sense to invest more in it, and if the marginal return is above 1, it makes sense to spend more, because each dollar spent returns more than one dollar in extra revenue.

Understand the terms "rival" and "excludable" with respect to economic goods

"Rivality" refers to how many people can use a good. A good is called a "rival" good if it can only be used by one person, or one group of persons at a time, and the use of the good by that person makes use by another person impossible. So, a Big Mac is clearly a rival good - if I eat it, you cannot. On the other, cable television is a non-rival good. One person using cable TV does not stop another person from using it. A movie ticket could be a rival or non-rival good. If there have been 100 tickets sold to see a movie in a 500-seat theater, then the 101st ticket is not a rival good, because the consumption of that ticket does not stop anybody else from seeing the movie. On the other hand, if the theater owner has sold 499 tickets, the 500th and last ticket will be a rival good. "Excludability" refers to the ability to stop somebody from consuming a good if they have not paid for it. If we assume for a minute that theft is not occurring, it is easy to see that excluding people from consuming Big Macs if they have not paid for them is easy. However, it can be difficult for other things. Every year on July 4th I sit in the parking lot of the local Wal-Mart and watch the spectacular fireworks display put on at Longwood gardens in Kennett Square, PA. If I wanted to go into Longwood Gardens to watch, I would have to pay $30 or more, but by sitting outside the grounds, I get to see the fireworks for free.

Suppose that at a price of $10 per box, a store will sell 1000 boxes of bananas a week. If the store raises its prices to $12 per box, it will sell 750 boxes. What is the elasticity?

1) Using the original formula, we get: eta = [(750 - 1000)/1000]/[(12-10)/10] = -0.25 / 0.20 = -1.25 2) Using the midpoint formula, we get: eta = [(750-1000)/(1000+750)]/[(12-10)/(10+12)] = [250/1750]/[2/22] = -0.1429/0.0909 = -1.57 So, these numbers are quite different. What about the point elasticity? Well, to answer this, we need the slope of a line. If we assume that the demand curve is a straight line, then what is the slope? Given that we have the points (Q,P ) = (1000, 10) and (750, 12), then the slope is ΔP/ΔQ = (12-10)/(750-1000) = -0.008. But in the elasticity, we need ΔQ/ΔP, which is -250/2 = -125. So at point 1, the point elasticity will be P/Q * ΔQ/ΔP= (10/1000) * -125 = -1.25. At point 2, it would be (12/750)*-125 = -2.

Describe what a bureaucracy is.

A bureaucracy is a response to a market failure, but is a form of government failure with 3 main elements: Bureaucracies carry out valuable programs for which society is willing to pay. The bureaucracy will maximize its own welfare. Bureaucracies are composed of individuals. These individuals act in their own best interests — not society's. The bureaucracy knows the true costs of its programs much better than any overseers.

Explain how common pool problems can be solved.

As a result of these characteristics, exploitation - overuse - usually results. A common pool presents a problem, in that nobody who uses a common pool has an incentive to consume less today and save some for tomorrow. If you chose to defer consumption of a good to tomorrow, then somebody else will come in and consume it today. Therefore, it is in your best interest to consume extra today. When many people behave like this, the common pool will be exhausted very quickly. Some common examples: Hunting/Fishing Endangered Species Water Resources In general, non-infinite renewable resources on non-private land The common answer to this is to grant property rights to the pool. Then, when somebody owns the pool, they have an incentive to preserve some of it for tomorrow. This is why cows are not in danger of becoming extinct - all cows are owned by somebody. African elephants were in danger of going extinct because nobody owned elephants, and people would kill them for ivory. In southern Africa, elephants have been converted to private property, and the population is growing. Note that the Indian elephant has never been at risk of extinction, because in India elephants are working animals that are owned by people.

Describe different approaches to pollution control.

As mentioned above, there are three general ways we can proceed: 1) Command and Control. This is exactly what it sounds like: governments issue commands in order to control the amount of pollution. If emitters fail to comply with these rules, they face criminal sanction and the possibility of fines and imprisonment. 2) Coasian permit trading. This is a system whereby the government delegates to itself the property right to emitting sulfur dioxide and then sells (or gives away) these property rights. A company needs a permit for every ton of SO2 they wish to emit into the environment, and the quantity of those permits is controlled by the government. This method has the benefit of allowing firms to trade permits so that firms that have a high cost of emitting can buy rights from firms that can reduce pollution at lower costs, which means that as a society we can have the same amount of pollution reduction as in the command and control method, but at a lower cost to society. This will be illustrated a little later. This method is called "cap and trade" because the government will set a cap on the amount of SO2 that can be emitted each year and then allow emitters to trade amongst themselves to obtain the socially efficient result. 3) Pigouvian taxes. These are taxes on pollutants, and got their name from the first person to propose them, a British economist called Arthur Pigou. This method contrasts with cap and trade in this way: with a Coasian system, we are setting the socially optimal quantity, and then allowing the price to find the market equilibrium. In theory, this is equivalent to the "social cost", the difference between the two supply curves in our social versus private equilibrium diagram. The good thing is, we do not have to try to figure out this cost, which can be extremely difficult to discover, but instead, we can simply let the market find the level. A Pigouvian tax moves the equilibrium from the private to the social one, but it does so by setting a fixed cost (the tax), and then allowing quantity to adjust in the marketplace. The problem with this system is that it requires more information. If the tax is too high, the quantity emitted will move to a quantity below the socially optimal value, which means that some wealth is destroyed. If the tax is too low, then we will not reduce pollution by very much, and will be producing at a level above the socially optimal amount, which is also not a wealth maximizing situation.

Explain what type of market failures are present with respect to carbon emissions.

agriculture forests species loss sea level rise increasing space cooling costs

Say we have an industry with four firms. They have market shares of 40%, 30%, 20% and 10% respectively. What is the HHI?

HHI = 402 + 302 + 202 + 102 = 1600 + 900 + 400 + 100 = 3000 Now what happens if the largest firm buys out the third largest firm? Now we have three firms with the following market shares: 60%, 30% and 10%. So, the HHI = 602 + 302 + 102 = 3600 + 900 + 100 = 4600. The concentration has increased by over 50%. If the HHI is less than 1000, a market is generally considered to be not concentrated. If the HHI is between 1000 and 1800, a market is thought to be "moderately concentrated." If the HHI is above 1,800, the industry is considered to be highly concentrated. In the third case, governments will often act to reduce concentration. This is called an "anti-trust" action.

George and Bill are stuck together on a desert island. There are two goods, Coconut (C) and Bananas (B). George has production function 5C+B=40, while Bill has production function C+3B=36. If they could not trade, George would choose to product 6C, while Bill would produce 8B. 1: Figure out George's opportunity cost;2: Figure out Bill's opportunity cost;3: Figure out each party's comparative advantage;4: Determine which good each party should specialize in, and determine production.

If they could not trade and George picks 6C that leaves him with 6C and 10B. Bill would have 8B and 12C. For a total of 18B and 18C. 1. George's opportunity cost for coconuts is for every one coconut he produces he could produce 5 bananas and for every one banana he produces he could have produced 1/5 of a coconut. So if he produces 6 coconuts the opportunity cost is 30 bananas 2. Bill's opportunity cost for bananas is for every one banana he could have 3 coconuts and for every one coconut he could have 1/3 of a banana. If he chooses to produce 8 bananas his opportunity cost is 24 coconuts. 3. George has a comparative advantage in producing bananas, 1B=1/5C vs Bill's 1B=3C.. Bill has a comparative advantage in producing coconuts, 1C=1/3B vs George's 1C=5B. 4. George should specialize in producing bananas and Bill should specialize in producing coconuts. If George only produces bananas he will have 40 bananas. If Bill only produces coconuts he will have 36 coconuts for a total of 40 bananas and 36 coconuts. This total is much better than if George choose to produces 6C and Bill choose to produce 8B.

Explain the fundamentals of the Coase Theorem.

If transactions costs are not "too high," the market will find the optimal (best, wealth maximizing) solution. But what constitutes "transactions costs?" What could be a transactions costs? Spite. Perhaps not so much in business, but often in divorce ("The War of the Roses" (1989)) Government Regulation and taxes; say a tax on trading Public goods problem. Instead of having only Ernie being affected by the toxins in the stream, let us have 100,000 residents in your hometown being affected. Now fighting pollution becomes a public goods problem. (So the problem with externalities is that they create public good problems.) Here the government could come in and impose a solution. The government could say: Don't pollute so much; or pay us X dollars every time you pollute. What is the difference? This theory was first elaborated by a professor by the name of Ronald Coase, who won the Nobel Prize in Economics for his work in 1991. He was the first person to observe that if property rights were well defined, and could be enforced, it was possible for a society to move to the socially optimal equilibrium in cases of pollution, or other externalities. In his honor, this has become known as the "Coase Theorem", and is the foundation of a large part of environmental legislation in the United States.

Describe what is meant by the term "load shape".

In electricity markets, the demand side is called the "load". The load is simply the sum of all demands for electricity in a market at any given time. The demand curve for electricity is considered to be a vertical line, which was previously described as a perfectly inelastic demand curve. Why is this so? When we flip on a TV or computer at home, or when a factory starts a machine, or an office or store opens and turns on the lights, we are assuming that the power will be there, instantly. Because load is changing instantly, we assume that whatever is being asked for RIGHT NOW is a fixed, and not a variable value. Whatever the load is, it must be served, meaning that it does not change according to what the price is. It does change from minute to minute, and hour to hour, and across seasons, but for every interval, it can be assumed constant, and if it is a constant, it will be a vertical line on the supply-demand graph. Thus, the price of electricity varies continuously as the intersection of the supply curve and the continuously-moving demand curve shifts about. In real-life, this calculation is done every five minutes, so in a typical wholesale electrcity market like PJM, there will be 12 prices per hour, changing once every five minutes. Load changes continuously as people turn stuff on and off, as temperature changes, as natural light comes and goes, and so on. This pattern of changing load is called a "load shape". We can have daily load shapes, weekly ones and annual ones. The following diagram shows the path of load for three different weeks at three different times of year in 2009.

List and describe the key points of Lester Brown's views on resource depletion

Nature's limits are beginning to impose themselves on the human agenda, initially at the local level, but also at the global level. Seafood prices are likely to keep rising for as long as population continues to grow. The combination of continuously rising demand and a shrinking resource base can lead from stability to instability and to collapse almost overnight. The escalating demand for food in China could convert the world grain market from a buyer's to a seller's market.

Explain what we mean by the "hidden costs" of price controls, and the effects of hidden costs on producer and consumer surplus.

Now, think about the "shortage". We have more buyers than sellers. Usually, the buyers will compete with each other by offering more money. But they are not allowed to do that here. But they will compete in other ways. They will wait in line longer. They will get out of bed earlier and show up at the shop earlier. They will buy from people on the black market. The people who want the goods the most will compete until they have the goods. They will use up resources (time, energy, money) in this competition, but those resources will not go to the seller. Instead, they are lost to society. If we look at the following diagram, we will see that the buyers will compete until the price has been driven up to the level called "PR", the "Real Price". Only people willing to pay more than PR will end up with the goods. The most they are allowed to pay in cash is PC, but they spend PR. The area between PC and PR is called the "hidden costs" - hidden because they are not observed in the official transaction. They are the costs of competing for the goods and are lost to society. So the "hidden cost" is the yellow part of this diagram. The green is the deadweight loss, and the consumer and producer surpluses are shown in blue and red. As we can see, the "real" wealth, the producer and consumer surpluses, are much smaller than they would be in a free market.

Explain the idea of concentrated benefits and distributed costs.

The Distribution of Costs and Benefits If it is clear that rent-seeking is a practice that costs society great amounts of wealth by competing with each other for government favors, then why does the public not band together to stop it? Well, since this is an economics class, you can expect an economic answer: because stopping it is usually not beneficial for members of the public, or, to put it another way, the costs of stopping this sort of behavior is generally greater than the benefits of doing so that would accrue to any individual. Suppose as a Penn State student (which I was, a few years ago), I am hurt by $10/year by a new program to buy all tenured faculty members new office furniture. Furthermore, suppose it costs me $50 (in cash and opportunities) - to organize with all affected people to fight the new program. Facing these alternatives, as a greedy individual, I am simply going to put up with the new program. It doesn't make economic sense for me to fight the program, even though fighting the program will probably be beneficial to students in aggregate. This is the problem of concentrated benefits and distributed costs. You are less likely to protest a new industry tax-break if 300,000,000 people share the costs than if only 1,000 people share the costs. When the group of people paying are affected enough, they will organize, in the form of protests, lobbies, campaign contributions, or political activism (i.e., running for office). Specifically, the costs of organizing have to be less than the cost of the program on the affected group. Finally, if I am rationally ignorant to the new cost (I don't directly know about it, and don't question a lower paycheck), I won't even consider raising an objection. In general, we see costs being spread over broad groups, and benefits concentrated on narrow groups. As the result of all this, we see small, highly organized groups gaining benefits, while the rationally ignorant masses pay! Examples The sugar industry maintains high profits because of the existence of import quotas - they do not have to compete with foreign competition because of rules put in place by the government. The end result is that sugar is about twice as expensive in the US as in neighboring countries. Because of this, everybody in the US pays a few more dollars per year for their groceries, but about 800 sugar-growing businesses benefit by hundreds of millions of dollars. Because the sugar industry gets such great benefits, they spend a lot of time and effort on politicians to make sure the import quotas stay in place.

Explain what "renewable portfolio standards" are.

The above slide displays states that have what is called a "renewable portfolio standard". What does this mean? It means that a certain portion of the power sold to end users in a state must come from renewable sources. This is how it works: A state government passes a rule saying that, for example, 25% of all electricity sold by a utility to end users must be from renewable sources. The government creates a device called a "renewable energy certificate", abbreviated "REC". When a company generates power from renewable sources, it is given a REC. When the company sells this power to a utility, it also sells the REC with the power - the utility has to buy the REC. The utility has to give the government a sum of RECs that is equivalent to 25% of the power they have sold. If they do not have enough RECs they have to pay a penalty, called an "alternate compliance payment (ACP)".

Describe and explain the basics of the greenhouse effect.

The basics: we start with something called the Greenhouse Effect. Inbound solar radiation (energy from the sun) has short wavelengths and high energy contents. The wavelength is typically less than 4 µm. This energy, in the form of radiation, passes through the atmosphere. Some of the energy is absorbed by the ground, causing the ground to warm up (which, in turn, warms the air), and some of the energy is reflected back towards space. As it reflects off the earth's surface, some of the energy is absorbed as heating and the resulting reflected radiation has lower energy levels and longer wavelengths, of 4-100 µm. The atmosphere is basically transparent to incoming radiation, letting about 50% through, but it is not transparent to the reflected waves, and about 80% of the outgoing radiation is trapped in the lower troposphere. The troposphere is the layer of the atmosphere closest to the earth's surface, extending up about 12 miles at the equator and about 4 miles at the poles. It is the layer of the atmosphere that contains clouds as well as most of the suspended particulate matter in the environment. The troposphere gets colder as you go upwards, which means that it is a very turbulent layer - because warm air rises, there is a lot of mixing in the troposphere. As mentioned above, the troposphere is not transparent to the lower-energy reflected solar radiation, and more of this radiation is trapped in the troposphere. This energy sort of hits a roadblock, and just piles up. This extra energy causes the troposphere to warm up, which eventually causes warming of the surface. This is why it is called the "Greenhouse" effect: in a greenhouse, panes of glass stop heat from rising out of the building, keeping the inside warmer and allowing us to grow plants in cold weather. In the atmosphere, greenhouse gases serve as the equivalent of the pane of glass - causing warmth to be trapped beneath it. Just like in a glass greenhouse, the temperature underneath is warmer than it otherwise would be. Take the roof off your garden greenhouse and the inside will soon be at the same temperature as the outside. The same is true of the earth - if we did not have gases in the troposphere trapping solar radiation, our planet would be much colder. Scientists have calculated that without the greenhouse effect, the planet would have a mean temperature of about zero degrees Fahrenheit. However, with the naturally occurring layer of greenhouse gases, the average global temperature is about 60oF. That is, the natural greenhouse effect makes the planet livable for us - without it, much more of our surface, and especially much more of our surface water, would be frozen.

Explain the difference between private and social costs.

The general issue here is one of costs: there are costs that are borne by the participants in the economic transaction, and then there are costs that are borne by non-participants - the external costs. The costs that the participants bear - the costs to the seller that are transferred to the buyer via the price mechanism - are what we call "private" costs. In an ideal world, all economic costs will be private - they will be all borne by the people who derive utility from the transaction. However, in reality, there are many cases where there are some costs that are transferred to non-participants - such as fisheries destroyed by acid rain, or the ill-health that comes from breathing dirty air, or the problems of trying to sleep near noisy factories or railroads. These costs, which are not carried by the manufacturer or purchaser of the goods in question, are what we call "social costs", because they are borne by society

production function

The relationship between the input and the outputs is called a "Production Function." Written in math terms, the production function is: Y = f(K, L, E, M)

Define what the "resource curse" is

The term resource curse represents an economic phenomenon associated with the abundance of natural resources in certain countries. The term summarizes a paradox that those naturally gifted resource countries do not always develop and grow their economies. It should be understood that if a country has a significant resource allocation, it should use them to their advantage. However, this has not always been the case in many countries with large reserves of resources. In fact, some studies reveal that such resource abundance has been pernicious to countries who own them. It is the meaning of what is termed the "resource curse." The term might seem to indicate that the resources themselves are generating the curse, for example, that the goods were not of good quality, or that using them inherently creates harm. However, studies show that the curse comes not in the good as such, but in the use made of them and the conditions of the country, its people, institutions and authorities that have received plenty of resources.

Describe situations where the Coase Theorem does not work well.

This can only work with low transaction costs, which is not the case: If there are many affected parties, so it is expensive to coordinate the necessary contracts for the sale of property rights. If one person can block the sale, regardless of the costs actually imposed on them. When enforcement of the contract can be expensive, such as the costs of court proceedings if there is a breach of contract. If the costs of monitoring the offending behavior are high. That is, can we tell if someone is polluting a river? Another issue facing application of the Coase Theorem is that of equity: it assumes that an affected party has the ability to pay a polluter to pollute less, which is not always the case. There is also a social issue here: the notion of paying a person in order to not perform a "bad deed' seems very wrong to many people. Looked at from the other perspective, allowing a company to make a payment to government in order to be able to emit pollution is seen by some people as wrong.

Define what we mean by the term "Malthusian"

This number, the maximum number of people the earth can "sustainably" support, has grown over the years with changes in technology, especially agricultural advances. Brown is the champion of the concept of "sustainable development", which refers to a way of life in which humans are "in balance" with nature, and not causing a net draw on nature's resources. The idea being, if we are diminishing the quality of the environment, and continue along the same path, then, inevitably, nature will be destroyed, and the human society that it supports must also fail. This way of looking at the world is known as "Malthusianism"

Describe the effects of these regulations on electricity prices.

This set of rules is viewed by many in the coal business as a "death of a thousand cuts". What will be the likely economic effects? There are two possibilities. The first is that a great many coal-fired power plants will retire, as they will not be able to afford the cost of installing all of the necessary equipment for scrubbing and controlling these emissions. There are about 300 GW of coal-fired power plants in the US. There have been many analyses done, and it is very likely that between 20 GW and 80 GW of these plants will be forced out of business by 2015. This will "shorten up" the coal part of the stack, meaning that more of the time, power will have to be served by higher-priced gas units. This is akin to moving the supply curve to the left. The second effect will be to raise the cost of coal-fired generation. By requiring more equipment, more permits, more scrubbers, and such, these plants will cost more to operate. This will raise up the coal part of the stack, making many of these plants more expensive than gas. This will have the effect of moving the supply curve upwards. We should remember from Lesson 4 what this will do. We know that moving the supply curve to the left is functionally the same as moving it upwards. Moving the supply curve upwards results in a lower quantity of consumption, and at a higher price. I will also remind you about the notion of internalizing externalities: when we do this, we strive to include the "social costs" into the economic transaction, and effectively, what we are striving to do is to move the supply curve up, and to the left, so that we move from the "private" equilibrium to the socially optimal equilibrium. That is the goal of these regulations: to internalize the external costs on the environment that come from burning coal. It remains to be seen whether the general public is willing to pay the price of this action, in the form of higher electricity costs.

Describe the relationship between politicians and the agencies they oversee.

This theory is a bit extreme, however: bureaucracies do have controls - politicians, who have to be elected. Occasionally, the public grows unhappy with the capture of wealth by bureaucrats and elects politicians who campaign on the promise of reducing the size, power and cost of the bureaucracy. Unfortunately, politicians often have less power than the bureaucrats, who have often been in their positions for many decades and know how to play the system and public sentiment. Bureaucracies are greedy and do have power, and are generally unwilling to give up that power. What incentives do agencies have to be efficient? Few, because being efficient means more work for less budget — we often hear the phrases "close enough for government work," and "in government, 10% of the people do 90% of the work." However, fear of losing the position provides some incentive for efficiency.

Understand the general concept of public choice theory.

We assume that greed motivates consumers and firms, and it is logical to assume this, since we all prefer more to less, and this assumption has been shown over time to be a reliable predictor of market actions and outcomes. We now know how government should behave (as summarized above), but we want to know how governments operate, i.e., we want a positive (rather than normative) answer. Within economics, this field of study is known as "Public Choice". It attempts to explain what factors determine how governments make decisions. Government is composed of government officials - elected politicians and civil servants. Remembering the framework of methodological individualism, we need to ask: What do government officials want? What motivates government officials? What incentives do they face? Politicians have one great goal, the one thing that defines them as successful politicians, which is the ability to get elected and then re-elected. A politician who cannot win an election is a poor politician indeed. Civil servants, on the other hand, are motivated by their desire to get promoted to positions of higher pay and higher authority. Using the simplest terms and most convenient definitions, GREED motivates both politicians and civil servants. Since government agencies are controlled by individuals motivated by greed, it is easy to imagine that these agencies are not always run in a manner consistent with society's best interest. Let us take a look at a basic civics lesson, from an economist's point of view. How does a politician get/keep her job? He or she gets elected by the voting public. Thus, we can say that voting is the first input to the political process (i.e., all power comes from the majority's mandate). Generally, in a representative democracy, we vote for a candidate who will represent us on all issues. However, it is unlikely that one candidate will mirror our desires completely. As a result, we must make compromises when we cast our votes. Most people tend to choose the candidate with a platform that, on average, matches ours better than any other candidate. However, there are a couple of other selection criteria that are also commonly employed by large shares of the electorate: choosing the candidate with the position closest to ours on the most important issue, and choosing the candidate who will do the least damage. The phenomena, (public choice and rational ignorance) taken together, are part of what we call the theory of public choice, which is a study of how the public makes collective decisions with respect to choosing government.

List and describe the key points of Julian Simon's views on cornucopianism

hus saith The Doomslayer, one Julian L. Simon, a neither shy nor retiring nor particularly mild-mannered professor of business administration at a middling eastern-seaboard state university. Simon paints a somewhat different picture of the human condition circa 1997. "Our species is better off in just about every measurable material way," he says. "Just about every important long-run measure of human material welfare shows improvement over the decades and centuries, in the United States and the rest of the world. Raw materials - all of them - have become less scarce rather than more. The air in the US and in other rich countries is irrefutably safer to breathe. Water cleanliness has improved. The environment is increasingly healthy, with every prospect that this trend will continue. "Fear is rampant about rapid rates of species extinction," he continues, "but the fear has little or no basis. The highest rate of observed extinction, though certainly more have gone extinct unobserved, is one species per year ..." (One species per year!) "... in contrast to the 40,000 per year that some ecologists have been forecasting for the year 2000. "The scare that farmlands are blowing and washing away is a fraud upon the public. The aggregate data on the condition of farmland and the rate of erosion do not support the concern about soil erosion. The data suggest that the condition of cropland has been improving rather than worsening." As for global deforestation, "the world is not being deforested; it is being reforested in general." Still, there is one resource that the world does not have enough of, that's actually getting rarer, according to Julian Simon. That resource: people. "People are becoming more scarce," he says, "even though there are more of us."

Define and explain what economic rents are.

is a term that describes payment made in exchange for temporary use of something, such as an apartment, a store, a car, or a DVD (think Netflix). However, to an economist, rent has a different meaning. An economic rent is defined as a return to a factor that is greater than the return required to incentivize the use of that factor. This is another way of describing an economic profit. Remember that an economic profit is a situation where a business generates profits that are larger than the risk-free rate plus an appropriate risk premium. In the case of economic rents, it means that some factor of production earns more than it "should" in equilibrium. In a market setting, this means that more of that factor will be employed, and competition will drive down the return to some equilibrium whereby zero economic profits are being made. Rents, like economic profits, can be thought of as "free money" - and everybody likes free money. One of the most common uses of the term is as part of the phrase "resource rents", which refers to the generation of positive economic profits from extracting minerals from the earth. For example, if the risk-adjusted cost of bringing oil out of the ground is $20 per barrel, and a company is able to sell that oil for $100 per barrel, then we say that they are collecting a resource rent of $80 per barrel. In economic theory, because there is so much "free money" in extracting oil, then there should be a rush into the oil business, more oil produced, and the price falls to $20. In reality, this tends not to happen quite so neatly - mostly because we have a cartel that supports the price of oil at high levels by limiting supply.

Risk premium (RP)

is the amount of profit that is paid to compensate for the chance that the investment will disappear. In the example shown above, the risk premium is equal to 16.67% - 5% = 11.67%. Because there is a 10% chance that your investment will vanish, the owner of the firm will have to promise to pay you an extra 11.67% IN ADDITION TO the risk-free return in order to get you to take the risk.

Explain what the concept of "methodological individualism" means.

methodological individualism is a way of looking at the world and a way of explaining outcomes that views institutions not as "things" in their entirety, but merely as collections of individuals. Thus, a government, a firm, a university, or some other grouping of people is merely a large collection of individuals and individual decisions. It boils down to this: only people can make decisions, and only people can perform actions. A firm does not make decisions; the managers inside it make decisions. Governments do not make decisions or take actions; the people who constitute the government, such as politicians and bureaucrats decide things and do things. Societies do not do things; people do things. Thus, every action taken by some collective entity, be it a government, a company, a school, a team, a society, or a family, is actually an action undertaken by a person, or multiple persons.

List and describe the main arguments for and against "energy independence"

ormally, this would be uncontroversial: In a market economy, if people wish to purchase the lowest opportunity-cost good out of a range of options, we generally cheer the ability to do so. But there is so much political noise made about reducing oil consumption. Why is this? Some people will point to the fact that there are some externalities that arise from consuming oil - externalities that are not properly included in the price that we pay for crude oil. These include: Pollution costs: driving cars soils the air, creating smog and ozone and harming many people with respiratory ailments in places such as Los Angeles and Houston. Carbon emissions leading to climate change. Highway and city road congestion: because driving is cheap, and most roads are not priced on a per-use basis, people have an incentive to "consume" too much highway, leading to congestion, which is a massive external cost imposed on everybody else who has to use the road, at least in places like the Boston-Washington corridor, where population levels are very high, and many of the roads get very full. This is a scenario I am familiar with every day, as I live in a semi-rural part of Central New Jersey, about 50 miles away from either Philadelphia or New York. Balance of trade costs: the money we ship overseas would better stimulate economic growth if it stayed in the country. This is a macroeconomic argument, so it is largely beyond the scope of this course. Much of the world's oil comes from unstable regions, and so the US has to pay for a large military in order to keep order around the world to keep the supply of oil flowing. The cost of this military expenditure is not directly included in the cost we pay at the gas station. Many of the people from whom we buy oil are enemies of the US, and we should try to avoid enriching them so that they can fund attacks on the US. Oil prices are very volatile, so being independent would shield us from large swings in the price of oil.