Econ 143 Final Prep

principles and practices of permaculture

1. Catch and Store 2. Organizing the System: 3. Integration, not Segregation 4. Produce No Waste

Problem with public goods

Public goods tend to be undersupplied due to the presence of free riders (a person who receives the benefit of a good without paying for it)

Liberal beliefs

Scientists universally agree that climate change is primarily caused by human activity (in reality, only 0.5% explicitly stated "that humans are the primary cause of recent global warming."

Externality

a cost or benefit that is "external," which means it is imposed on those not involved in the transaction or decision

Law of diminishing marginal utility

as the consumption of a product increases, the marginal utility derived from additional consumption will eventually decline

Produce no waste: fermentation

Nutrient-rich fertilizing water can be made by throwing coconuts, weeds, leaves, a little sugar, and water into a barrel and allowing it to ferment. This helps produce microbes which unlocks nutrients in the soil

Characteristic of public good: non-rival in consumption

making the good available to one consumer does not reduce its availability to others.

Renewable resources

resources that grows in time according to its biological process (fisheries, timber stands, and solar energy)

Sustainability

the idea of making decisions in the short-run that do not have serious negative impacts in the long-run

Costs of letting tree grow

the opportunity cost of forgone tree revenue (lost value of having the money now and what that money could have earned if invested)

Commercial agriculture

• farming for a profit, where food is produced by advanced technological means for sale in the market • This form of farming has becoming very capital intensive, rather than labor intensive

Not in long-run equilibrium

• if the firm is making positive economic profits, firms will enter and drive price down to where they all make zero economic profit. •If the firm is making economic losses, the firms will exit the market driving price up until the remaining firms are making zero economic profit.

Advantages of decentralized policy

1. Assuming an appropriate set-up, there are limited enforcement costs 2. The parties involved who are directly impacted can determine damage costs 3. There is a strong incentive to find a solution

Steps to draw a graph of a market before and after the effect of external benefits are taken into account and calculate deadweight loss

1. Be able to solve for the equilibrium price, equilibrium quantity, demand intercept, supply intercept, consumer surplus, producer surplus, and total surplus like in the market equilibrium example above (solving for EM). Be able to graph solutions 2. Be able to calculate Marginal Social Benefit (MSB) = Private Marginal Willingness to Pay (MWTP) + Marginal External Benefit (MEB) 3. Set MSB = Supply to solve for q*, p*, and new MSB intercept (be able to graph solutions). 4. Plug qm into MSB to finish finding the dimensions of the deadweight loss triangle and calculate deadweight loss.

Steps to draw a graph of a market before and after the effect of external costs are taken into account and calculate deadweight loss

1. Be able to solve for the equilibrium price, equilibrium quantity, demand intercept, supply intercept, consumer surplus, producer surplus, and total surplus like in the market equilibrium example above (solving for EM). Be able to graph solutions 2. Be able to calculate Marginal Social Cost (MSC) = Marginal Private Cost (MPC) + Marginal External Cost (MEC) 3. Set MSC = Demand to solve for q*, p*, and new MSC intercept (be able to graph solutions). 4. Plug qm into MSC to finish finding the dimensions of the deadweight loss triangle and calculate deadweight loss.

Process of commercial agriculture

1. Chemical fertilizer big fat nitrogen-rich plants, which attract a lot of bugs → 2. Commercial insecticides/pesticides: wards off plant predators 3. Fungicides: are also spread to protect plants from parasitic fungi and their spores 4. These chemicals can be damaging to the plants as well, so scientists have invented Genetically Modified Organisms (GMO's)

Factors that could shift the Marginal Damage Cost (MDC) curves

1. Differences in Population exposed 2. Different time periods 3. New scientific estimates of increased pollution impact

costs and benefits of the different ways the government can allocate permits

1. Give permits to firms with a higher abatement costs 2. Give permits to the newest firms in the industry 3. Allocate permits through auctions

Benefits of Commercial Agriculture:

1. Grows a lot of food more quickly and easily, which lowers the price of the food and makes it more affordable 2. Competitive pressure in the commercial agriculture industry has led to innovations that have allowed us to feed much of the world's growing population.

Benefits of permaculture

1. If set-up properly, the system is largely designed to manage itself (low variable costs) 2. A small piece of land can produce a variety of organically grown food in a sustainable manner

Costs of permaculture

1. It is very labor intensive with high fixed costs in the beginning 2. Not ideally suited for large pieces of arable land

Costs of Commercial Agriculture

1. Its capital intensity means there are high start-up costs making it difficult for the poor to compete in the market 2. It does not employ nearly as many people as a agriculture used to (people have lost a connection with their food) 3. Their could be some potentially negative health and environmental side-effects of commercial agriculture's production methods.

Sources of market failure (with potential government solutions)

1. Lack of Competition and Natural Monopolies (anti-trust laws, regulations, and government provision) 2, Lack of Information (regulation and enforcement) 3. Externalities (taxes and subsidies) 4. Public Goods (taxes and government provision)

Sources of government failure (the inefficiency that results from the ways that government officials make decisions when interacting with the economy)

1. Lack of Profit Motive 2. Short-sightedness Effect 3. Rent-Seeking and the Special Interest Effect (Crony Capitalism)

Benefits of Genetically Modified Crops / Food:

1. More resistant to insects and insecticide 2. More tolerant to herbicide 3. More tolerant to heat, cold, and drought 4. Higher crop yields 5. GMO's have saved a lot of lives from starvation, particularly in developing countries

Myths and truths about clearcutting

1. Myth: Clearcutting is about harvesting trees at the expense of the environment (truth: The principle objective of clearcutting is to regenerate the forest with healthier trees, not to harvest timber.) 2. Myth: Clearcutting causes soil erosion (Truth: Clearcutting does not cause soil erosion, poorly laid out road systems created by loggers does.) 3. Myth: Logging companies prefer clearcutting because it is the most economical way to harvest timber (Truth: Many logging companies dislike clearcutting because it forces them to spend time and money cutting down trees they have no use for.) 4. Clearcutting destroys animals' natural habitat (Truth: Clearcutting can be very beneficial to wildlife by increasing the biological diversity of the forest)

Costs of Genetically Modified Crops / Food:

1. Possible increase in allergies? 2. Possibly creates a resistance to antibiotics? 3. Possibly increased cancer rates?

Public Goods Potential Solutions

1. Private agreements (example: Homeowner's Association) 2. Direct Government Intervention (example: Taxes) 3. Private markets can provide a public good by tying it to a private good when possible (example: radio broadcasts/advertising and lighthouses/docking fees)

Steps to figure out the optimal level of emissions from each firm once the optimal amount of pollution is found

1. Set MAC = MDC (efficiency constraint) 2. Substitute in the abatement constraint: eA + eB = optimal number of 3. emissions Solve for eA and eB

Steps to figure out and graph the optimal tax as well as the optimal amount of emissions for each firm when the government wants to hold pollution to a certain level of emissions among multiple firms.

1. Set MAC = MDC (efficiency constraint) 2. Substitute in the abatement constraint: eA + eB = pollution limit 3. Solve for eA and eB 4. Plug eA into MACA and/or eB into MACB to get the optimal tax rate 5. Calculate both the tax cost and abatement cost for each firm 6. Know what might happen if the government gets to involved in forcing companies to emit a certain amount in addition to taxing the amount emitted (be able to calculate the total cost for each firm again and compare it to the previous total costs).

Steps to calculate and graph the optimal amount of emissions for each firm, the permit trading price range, and final permit selling price for each firm in a cap and trade system of tradeable pollution permits.

1. Set MAC = MDC (efficiency constraint) 2. Substitute in the abatement constraint: eA + eB = pollution limit 3. Solve for eA and eB 4. Plug the initial emission allocation into the MAC equation for each firm in order to get the permit trading price range 5. Plug eA into MACA and/or eB into MACB to get the final permit selling price

Steps to find how a tax on emissions affects one firms level of emissions

1. Set MAC = Tax to get the optimal level of emissions 2. Be able to calculate the tax revenue (tax cost to the firm) at the optimal level of emissions 3. Be able to calculate the total cost to the firm (tax cost + abatement cost) 4. Know why the optimal level of emissions is optimal for the firm (if emissions were higher or if emissions were lower, the total cost the firms would have to pay would be higher)

Steps to find the socially efficient level of emissions (optimal level of pollution)

1. Set marginal damage costs equal to marginal abatement costs 2. Calculate total damage costs as the area under the marginal damage cost curve 3. Calculate total abatement costs as the area under the marginal abatement cost curve 4. Calculate total pollution costs = total damage costs + total abatement costs

Steps to solve for and graphically represent a market equilibrium from a set of equations and find consumer surplus, producer surplus, and total welfare

1. Set the two equations equal to each other to find Q* 2. Plug Q* into either or both equations to determine P* 3. Set Q equal to 0 to find the Demand and Supply intercepts (be able to draw graph) 4. Calculate consumer surplus as the area under the demand curve and above P* (area of a triangle equals 1/2BH) 5. Calculate producer surplus as the area above the supply curve but below P* ((area of a triangle equals 1/2BH) 6. Calculate total welfare by adding consumer surplus and producer surplus

Worcester's Pay-As-You-Throw trash collection system

Worcester, Massachusetts adopted a trash collection program in 1993 that charged $1.50 for large 30 gallon trash bags, and $0.75 for a smaller 15-gallon bag 1. Recycling rate went from 2% to 38% 2. Worcester residents average 400 lbs of trash per person per year compared to the national average of 900 lbs 3. An estimated 400000 lbs of trash that would have ended up in landfills was recycled instead 4. The program has saved Worcester an estimated $10-$20 million over 20 years, and revenues are used to support a curbside recycling program 5. There were some issues of increase illegal dumping and complications in how to apply the system to apartment complexes

Economic approach

explores environmental issues from the standpoint of competing preferences, using cost-benefit analysis in an effort to reach a social optimum

Perverse Incentives

incentives created by a policy that work against the overall objective of the policy

Decentralized policy

policies where individuals can work out an efficient solution and achieve a socially outcome without any intervention example: Liability law-someone gets held responsible for a bad outcome (requires compensation for damages to the injured), so firms and people should be held liable for environmental damages

Noncumulative pollutants

pollution that exists as long as the source is present, but fades out of existence when the source shuts down (noise pollution)

Production possibilities curve

shows the different maximum combinations of two things a society may produce at any time, given its resources and technological capabilities

Normative economics

the analysis of subjective opinions which are not testable

Environmental Economics

the application of the principles of economics to the study of how environmental resources are managed

Secondary effects

the indirect impact of an event or policy that may not be easily and immediately observable

Carrying capacity

the maximum population size of the species that the environment can sustain indefinitely, given the food, habitat, water, and other necessities available in the environment.

Characteristics of market equilibrium

• All trades generating more benefits than costs are undertaken • No trades generating more costs than benefits are undertaken • The combined area of producer and consumer surplus is maximized • There is no excess supply or excess demand: • If price is higher than the equilibrium price, then there is an excess supply (quantity supplied > quantity demanded) and a tendency for price to decrease until you are back in market equilibrium. • If price is lower than the equilibrium price, then there is excess demand (quantity supplied < quantity demanded) and a tendency for price to increase until you are back in market equilibrium.

Produce no waste: biochar

• Burning any carbon-heavy material (rice husks, corn husks) creates a substance that can be added to soil to increase water retention and good fungal growth

Making compost using Berkeley 18-Day composting method

• Compost pile: 3 meters long, 1 meter wide, about 1 meter high 1. Brown matter: anything dense in carbon (leaves, wood chips, hay/straw, newspaper, cardboard/beer cases, cotton clothing cut into small pieces) 2. Green matter: food scraps, grass clippings, coffee grounds, weeds 3. High nitrogen: manure, urine, dead stuff • General rule for more temperate climates: 40% brown matter, 40% green matter, 20% high nitrogen • After 4 days, check the compost pile with a thermometer (it should be between 140 and 160 degrees) • Below 140? Add more high nitrogen • Above 160? Add more brown matter

Demand curve from people's marginal willingness to pay

• Demand curve: shows the typically inverse relationship between the price of the good or service and the quantity an individual is willing to purchase • Marginal willingness to pay: the additional amount we are willing to pay for one more unit of the good

Organizing the system

• Design from patterns to details • Ideally, you want to set up your permaculture system to eliminate waste and do the work for you • Example: placing the hen house next to the catfish pond so the catfish can feed off the hen's excrement • Example: planting lime trees close to the duck pond so the will eat the slugs attracted by the mine trees, then aerate the soil when they walk and fertilize the soil when they defecate

Endangered species act

• Designed to save the red-cockaded woodpecker resulted in the premature harvesting of the trees that the woodpecker likes to nest in, causing the woodpecker to become even more endangered (secondary effect)

Decision making process in the fishing industry as to when effort should be increased or decreased

• E* (level of effort that maximizes profit) at R* (removal rate that maximizes profit for an individual fisher person) • Eprofit = 0 (long-run equilibrium level of effort (TR = TC)) at Rmax (maximum sustainable yield)

The Clean Air Act

• Had stringent pollution control requirements for new sources of pollution than for existing sources of pollution • This incentivized companies to hold on to the other pollution causing plants for as long as possible • The EPA then put in a procedure called New Source Review (NSR), but this further reduced the incentive of existing plants to make any changes towards pollution control

How economists approach climate change debate

• How much of the climate change is caused by human activity? • What is the cost of reducing this human activity in an effort slow down climate change? • What are the benefits of reducing human being's contributions to climate change and do they outweigh the costs?

Steps to find marginal benefit and cost on a table

• MB = difference in total benefit of a unit of acres and the preceding unit of acres • MC = difference in total cost of a unit of acres and the preceding unit of acres

Catch and store

• Permaculture practices depend on the environment you are in, and in tropical and rainy environment's, its about managing rainfall and water • The 3 S's of managin water: slow it down, spread it out, sink it in

Solving negative externalities

• Pigouvian Tax: a tax on the producer in the amount of the external cost being created (it's hard to know exactly what that amount is) • Coase Theorem: bargaining between parties to reach an efficient outcome (only possible if transaction costs are low) • Internalize the cost through private property rights, such as individual tradeable quotas (it can be costly to monitor and enforce)

Unstable vs stable equilibrium

• Point U is an unstable equilibrium: anywhere near point U leads to a tendency to move away from point U • Point S is a stable equilibrium: Anywhere near point S leads to a tendency to move toward point S

How to read fishery graph

• R ~ removal rate • G ~ fish population growth rate • S ~ fish stock • I ~ increase in fish stock • I1 = G1 - R1 increase in fish stock at S1 (S2 = S1 + I1) • I2 = G2 - R1 increase in fish stock at S2 (S3 = S2 + I2) • When R = G, I = 0 our fish population won't change

Improvements in technology (T)

• Subtract from MAC by decreasing the y-intercept of the MAC curve • Decreases MDC, MAC, and optimal level of emissions

Characteristics of perfectly competitive markets (where P = MR for each firm)

• There are a large number of firms and consumers in the market, so no one producer or consumer can change the price • All of the products are identical • There are no barriers to entry or exit • There are low costs to obtaining information and engaging in transactions • Firms can sell all that they want at the market price

Produce no waste: worm castings

• These basins are filled with pig manure and worms who recycle that manure • Once a day, water is poured in and drained from a hole and pipe in the bottom • This nutrient-rich fertilized water can then be used for crops

Integration, not segregation

• companion planting and crop synergies • Banana trees are also planted around the duck pond so the shade will help keep the water from evaporating • Planted next to every banana tree (water and potassium producers) are coconut trees (Water and potassium consumers) • Nitrogen fixing plants are also planted around trees to help replenish the soil to improve the growth of the trees and avoid the degradation of the soil • Lettuce, onions, and carrots are all grown together together because they all extract nutrients from different parts of the soil, and so there is no competition between them

Responding to incentives

• people respond in (mostly) predictable ways in response to changes in costs and benefits • Individuals and households tend to maximize happiness (utility), while businesses tend to maximize profits

Assimilative capacity

• the ability of the natural system to accept a certain amount of pollutants and render them benign or inoffensive • important for determining environmental policy because the Earth cannot function without some pollutants (i.e. carbon dioxide)

Enforcement costs (E)

• the costs of the resources that must be dedicated to enforcing abatement • include: 1. Private costs: such as added record keeping by the polluters 2. Public costs: various regulatory aspects of the enforcement process • add to MAC by increasing the y-intercept of the MAC curve • Increases MDC, MAC, and optimal level of emissions

Green New Deal Policy

"The main environmental goal is meeting 100% of the power demand in the US through clean, renewable, and zero-emission energy sources by the year 2030"

Maximum Sustainable Yield

The most of a renewable resource that can be removed every period indefinitely

Disadvantages of decentralized policy

1. You need to have a small number of parties and/or low negotiation costs 2. Socially optimal solution might still not satisfy those who have a more moralistic approach to environmentalism.

Benefits of letting tree grow

Bigger tree = more wood to sell

Clearcutting, shelterwood cutting, and diameter-limit cutting

Clearcut: If you have trees that require sunlight to grow (ex. Aspen, Red Pine, Spruce, Oak) and you want to preserve most species of wildlife A. Benefits: some income now, rejuvenation of the forest for future income later B. Costs: Does not maximize your current income, not aesthetically pleasing in the short run Shelterwood cut: If you have trees that are more shade-tolerant (ex. White pine, maple, yellow birch, hemlock, northern and central hardwoods) A. Benefits: Some income now, more aesthetically pleasing because it can be managed for the future via thinnings rather than clear-cuts B. Costs: Does not maximize your current income, these species of wood are less profitable and less desirable to wildlife Diameter-limit (select) cutting or high-grading: cutting only the most profitable trees A. Benefits: maximizes your current income B. Degrades the long-term health (and future income) of the forest

Conservative beliefs

Climate change is a hoax (in reality there is overwhelming statistical evidence that climate change is happening)

Episodic emissions

Emissions that occur as a result of a one-time accident or incident (accidental oil or chemical spill)

Moral approach

Environmental degradation is the result of unethical and immoral human behavior and those who prefer to help the environment at the expense of economic progress are inherently good while those who prefer economic progress at the expense of environmental quality are inherently evil or misguided.

Steps to determine how firms maximize profits by producing where marginal revenue is equal to marginal cost, and be able to calculate the profits a firm is making

Example: If the market price is $30 and firms face the following cost functions: total cost curve, TC = q2 + 10q + 50, marginal cost curve, MC = 2q + 10, average total cost curve, ATC = q + 10 + 50/q: 1. Set MC = MR (in this case set 2q + 10 = 30) and solve for q* 2. Use q* to determine the firms profits: plug q* into either of the following: TR-TC: (p x q*) - (q*2 + 10q* + 50) [P - ATC} x q*: {P - (q* + 10 + 50/q*)} x q* 3. Determine if the market is in long-run equilibrium

Public goods

Goods, such as clean air and clean water, that everyone must share.

Combining the optimal level of pollution with the equimarginal principle

If a firm has multiple sources of pollution with different marginal abatement costs, then we should abate pollution where the marginal abatement costs are lowest

Cutting tree based on tree's growth rate and interest rate and market rate

Imagine that a tree can sell for $500 today and has a growth rate (g) of 7% (0.07) per year. The current market interest rate (r) is 5% (0.05). Should we cut down the tree now, or one year from now? A. Cutting down the tree today and investing money $500 x (1 + r) = $500 x (1 + 0.05) = $500 x (1.05) = $525 one year from now B. Cutting down the tree one year from now $500 x (1 + g) = $500 x (1 + 0.07) = $500 x (1.07) = $535 one year from now If g > r, and the tree is still growing, it's better to wait If g < r, better to cut the tree down

CA's plastic bag ban

In 11/2016, voters voted in favor of prop 67, which outlawed the use of "single-use" plastic bags by grocery stores and other major retailers The effects include: 1. An 8.8% decrease in plastic grocery bag litter on CA beaches 2. The disappearance of 35 million single-use plastic bags that were being produced every day before the ban Secondary effect: increased sales of Garbage Bags. There was a 40 million lb drop in single-use plastic bags, but a 12 million lb increase in garbage bag sales

Private property rights

Incentivize people to: 1. Use your property in ways that benefit others 2. Care for what they own 3. Make sure their property does not damage anybody else's property 4. Conserve for the future

Fish populations and growth rates

Low levels of fish (L): growth rate is low, food/space is abundant, potential mates are scarce Medium levels of fish (M): growth rate is high, food/space is abundant, potential mates are plentiful High levels of fish (H): growth rate is low, food/space is scarce, potential mates are abundant, easier prey for predators

Why marginal cost decreases at first then increases

Marginal costs decrease at first possibly because of bulk discounts and synergies in labor. Eventually, bulk discounts become saturated and workers become less productive, illustrating the law of diminishing returns. As a result, marginal costs increase later on.

Solving positive externalities

Pigouvian Subsidy: a subsidy on the producer in the amount of the external benefit being created (it's hard to know exactly what that amount is, and subsidizing some industries/companies and not others could lead to increased lobbying and corruption)

Nonpoint-source pollutants

Pollution for which there are no well-defined points of discharge (agricultural chemical run-off)

Point-source pollutants

Pollution for which there is a well-defined point of discharge (smoke stacks at a plant)

Cumulative pollutants

Pollution that cumulates in the environment in nearly the same amount that it is emitted, and continues to exist even after the source is stopped (plastics, radioactive waste)

Continuous emissions

Re-occurring emissions as part of a regular production process (electric power plants, waste treatment plants)

Nonrenewable resources

Resources for which there is no process of replenishment (petroleum reservoirs and non energy mineral deposits)

Positive externality

When the actions of a producer impose an external benefit on a non-consenting 3rd party. This results in the market producing too little (flu vaccinations, education, honey bee pollination)

Emission damage function

The connection between the quantity of a residual emitted from a source or group of sources and the resulting damage

Negative externality

When the actions of a producer impose an external cost on a non-consenting 3rd party. This results in the market producing too much (second-hand smoke, loud noise, pollution)

GMO's

a plant, animal, microorganism or other organism whose genetic makeup has been modified in a laboratory using genetic engineering or transgenic technology (commercial sale began in 1994)

Permaculture

a set of design principles centered around whole agricultural systems simulating or directly utilizing the patterns and resilient features of a natural ecosystem.

Characteristic of public good: non-excludable

it is impossible (or incredibly costly) to exclude nonpaying customers from receiving the good.

Ambient Damage Functions

the relationship between the concentration of particular pollutants in the surrounding environment and the resulting damages.

Postive economics

the study of testable facts

Long-run equilibrium

zero economic profit