Exam 1 - Energy Econ. & Policy

14. In theory, is it possible through a combustion process to convert chemical energy (e.g., as found in coal) into mechanical energy with perfect efficiency? According to Carnot's theory of "heat engines", what would it take (i.e., a necessary design condition) in order to convert heat energy into mechanical energy with 100% efficiency through the use of a heat engine? State and briefly explain the simple Carnot equation governing the theoretical maximum efficiency of this conversion of thermal into mechanical energy. (In your explanation you may find it useful to explain the analogy between Carnot's equation for the maximum efficiency of a heat engine and the conversion of potential energy into mechanical energy as a result of the dropping of water from a higher elevation through a hydroelectric turbine located at a lower elevation.)

- To get 100% efficiency you would need tech that made the exhaust absolute zero degrees Kelvin. - In order to get the highest maximum theoretical efficiency, you can decrease the low temperature or increase the high temperature in a heat engine - Economically cheaper to crank up the heat than to try to refrigerate and lower the temperature - You can also have tech that harnesses the "waste" energy and uses it for another purpose

2. What previous two basic categories of energy studies came together and merged into the study of "thermodynamics" in the mid-1800s. What do the First and Second Laws of Thermodynamics say? What is their main significance relative to the economics of energy?

*Studies of Motion:* Newton's Laws of Motion (1600s) *Studies of Heat:* The behavior of "caloric fluid" (1600s-1800s) *The First Law (Conservation of Energy):* o *Closed system* energy transferred to work or to heat, but the total amount of energy is conserved. o *Open system* Δinternal energy of the system = Δheat supplied system - amount of work done by system on its surroundings (*just "imports" minus "exports"*). *The Second Law (The Entropy Law):* o *Closed system* energy available to do work constantly declines. o heat always flows from hot body to cold one. o *Entropy* (degree of disorderliness) of a closed system always *increases* or remains constant. *Example:* a coffee cup loses its heat in a classroom - but makes the classroom slightly warmer. Entropy law: heat energy dissapates into the cold energy. We rely on the differentials of energy to do work *Class Example* *Econ of Energy significance:* - No process is perfectly reversible - there are "no free lunches," aka there will always be an energy cost - Perpetual motion machines are impossible - fossil fuels can release their energy *only once* meaning there is always *OPPORTUNITY COST in energy use*

6. Briefly explain what has come to be known as the Khazzoom-Brookes Postulate?

*The Khazzoom-Brookes Postulate:* hypothesizing that public policies promote energy efficiency were likely to not be as effective in reducing energy consumption as predicted using pure "engineering" analysis because of the changes they were likely to induce in human behavior.

13. When neoclassical economists analyze the sustainability issue, they generally adopt a "weak sustainability" framework rather than some form of a "strong sustainability" framework. What's the basic difference between the two different normative criteria of "weak sustainability" and "strong sustainability"?

*Weak form:* the ability of society to *generate a stream of consumption* possibilities capable of sustaining per-capita utility over future time periods. *Strong form:* would *supplement utility as the "figure of merit"* with other objectives or constraints such as maintaining all unique capital stocks. (ex. Grand Canyon, endangered species, etc.)

2. Describe the condition (i.e., relationship between market price and production cost) that characterizes the *long-run competitive equilibrium* of the typical *manufacturing firm* operating in a perfectly competitive market. Now state the corresponding condition (i.e., relationship between market price and production cost) that characterizes the *long-run competitive equilibrium* for a *mining firm* operating in a perfectly competitive market. Carefully explain the reason for the difference between these two different conditions of long-run equilibrium. If there is an additional component in one first-order condition equation compared to the other, be sure to fully explain the nature of that additional component.

- *Standard Competitive Manufacturing firm:* P=LRMC - *Competitive Mining firm:* P=LRMC + user cost (opportunity cost of not having it to sell at future date)

7. What key categories of changes are likely to affect the trajectory of mineral prices through time. Name as many important broad categories of changes as you can think of, and the directional impact you would expect them to have on the price path and annual production amounts.

- *ore quality*: if low quality, mining costs increase - *substitutes*: if this increases, mineral prices decrease - *extraction technology*: if this increases, mineral prices decrease - *regulations*: increase, then mineral prices increase - interest rates - fixed and known stocks

6. Briefly discuss the nature of the basic challenges presented in transitioning from fossil fuels to renewable fuels due to significant difference in energy and power densities.

- Coal is compact, ready available, and energy dense - Many renewable energy sources are either low-quality, as in they are not energy or power dense, or they are incredibly hard to collect - As Prof puts it, they are subtle, and therefore hard to convert into useable energy sources - We need a huge development in technology and investment in infrastructure to implement structures that will harness these energy sources efficiently - Energy production from renewable sources is less instantaneous, so we have to find a way to harness all the energy when it is at its peak and then somehow store it in order to be able to use it during high-demand, peak hours

5. Use a two-period constrained utility maximization diagram to illustrate the consumer's choices in the following situation. The consumer begins with an initial endowment of wealth consisting of present goods only, and no future goods. The consumer can invest in a variety of potential "real" investment opportunities whereby the consumer can convert present goods into future goods at varying rates of return (i.e., various rates of converting present goods into future goods). The consumer can also make transactions in a financial market by either purchasing the right to future goods by giving up a specific amount of present goods (i.e., lend at a fixed interest rate) or purchasing a number of additional present goods by selling his/her right to a certain amount of future goods (i.e., borrow at a fixed interest rate). Making explicit use of indifference curves in intertemporal consumption space, draw the consumer's constrained utility maximization point. • Explain how this simple model illustrates that an individual can maximize his/her intertemporal consumption-possibility set by undertaking all investments with an internal rate of return (IRR) greater than the prevailing market rate of interest. • Explain graphically how this investment behavior could also be described as undertaking all incremental investments having a positive net present value (NPV). • Explain graphically how this model also illustrates that the consumer will manage his/her initial assets in such a manner as to maximize the discounted present value of his/her wealth. (Very closely related to the previous question.) • Briefly explain how this example also illustrates Fisher's Separation Theorem. What two distinct decisions does Fisher's Separation Theorem refer to the "separation" of?

- Point G illustrates how an indivudal can maximize his/herintertemporal consumption-possibility set at an investment optimum - *Fisher Separation Theorem* makes the point that the investment optimum and the consumption optimum are logically separable in a world in which financial transactions can be conducted with other members of society ** Overall, simultaneously making two decisions Choosing to optimize investment and consumption What should I do with my wealth, what should I consume? We are looking at both investing and looking how much to invest to be comfortably consuming Investing is straightforward, IRR > interest rate, even if I have to borrow make sure that this applies Investment optimum = Undertaking investment IRR > interest rate What I outa do, maximize the investment of investment portfolio (wealth), undertaking all that has postive net value Logically separately, what do I want to consume this year, and how much do I want to save for the future Difference robinson crusoe- investment optimum is the same as consumption, NOT SEPARATE The reason why it is separate because we can do transaction with others - The fisher diagram ; Discount present value: the current market value of your wealth (investment portfolio) in the diagram - it corresponds to a point along the x-axis,

*Brief Overview of Historical Transitions in Energy Use* 1. In modern engineering terminology, what is usually meant by a "prime mover"? An important part of the energy transition during the past several hundred years has involved the co-evolution of both fuels and prime movers. Briefly discuss the various major fuels and prime movers that have been involved in this transition during the "early industrial age", and the more advanced industrial age in which we now live. Use a good example to illustrate this process of "co-evolution".

- Prime mover: Things that convert energy into mechanical motion - Machines, or prime movers, have adapted and changed with the types of fuels that can power them

5. What are the key challenges in successfully transitioning to a post-fossil energy system based on renewable energy sources?

- Renewable energy sources are often either extensive, and low-quality (not energy or power dense) or high-quality, but limited - Need to invest in renewable energy infrastructure - Easy to continue to use coal because it is power/energy dense and there are already sunk costs in the infrastructure for fossil fuels - Innovation and continuing coevolution in prime movers -- machines need to adapt to the fuels we are using - Strong public policy

*The Concept of "Rents" and Its Many Terminological Variations* 1. Classical economists first coined the term "rent" and it has "stuck" in the economics profession, even though its precise meaning has migrated a bit. When the term "rent" was first coined by classical economists, what was it used to refer to?

"Economic Rent" is the entire payment received by a factor of production that is in fixed supply in a competitive market. "Rent" the word came from Ricardian Rent when the producer surplus is gained by comparative productivity of land.

8. Assume an initial endowment point lying in the interior of a two-period intertemporal consumption diagram. Using this diagram and initial endowment point, along with some simple algebra applicable to compounding and discounting, show where on the graph you can locate the present value and the future values of this initial endowment point. Make sure to explicitly show why each of these two points is mathematically the present value and future value respectively.

"Future Compounded Value" of Point A: **FV(A) = C0* **(1 +r ) + C1** "Present Discounted Value" of Point A: **PV(A) = C0* + *C1** / (1 + r)**

4. In what way does the EROI literature point to a basic problem that, when combined with the Peak Oil hypothesis, make the adverse implications of the Peak Oil hypothesis even more concerning?

"the EROI construct emphasizes something that the Peak Oil advocates simply verbalize: *exotic sources of additional hydrocarbons will become increasingly expensive as we proceed to try to exploit them* as a solution to alleviate the the increasing energy shortages." layman terms: EROI makes the Peak Oil hypothesis more concerning because it puts both a *net energy cost* and a *dollar cost* on finding more sources of hydrocarbons, rather than just the *gross* physical availability of those sources. It's the "energy cost of energy." The lower our EROI in obtaining oil, the lower our net energy gained.

22. Discuss the broad potential relationships among: (1) market allocations of resources, (2) Pareto-efficient allocations of resources, and (3) sustainable (i.e., intergenerationally "equitable") allocations of resources (assuming "weak sustainability" as the underlying concept of sustainability)? Specifically, be sure to explain how a market-based resource allocation might not be Pareto efficient. Give an example. Furthermore, be sure to explain whether, and why, a Pareto efficient market allocation will also be intergenerationally equitable.

(1) *Market allocations of resources* are based on the notion that "markets are as markets do," meaning the market dictates how resources are distributed. This type of state *may or may not* result in either a pareto efficient or an intergenerationally "equitable" allocation of resources, depending on the situation. (1a) Example of how market-based resource allocation might not be pareto-efficient: oil companies will not likely tell you that we are depleting fossil fuels along some path that will ultimately lead to lower welfare for future generations (2) *Pareto efficient allocations of resources* don't assure sustainability, nor do they inherently lead to non-sustainability. Uncritical adherence to ideological paths does not help in addressing the issues surrounding intergenerational fairness and sustainability. (3)*Sustainable allocations of resources* are not guaranteed by either a market-driven or Pareto-efficient economy. Achieving sustainability may require voluntary forbearance by the present generation.

6. Briefly explain and distinguish the economic concepts of resource "depletion" and resource "exhaustion"? Explain what sorts of things might contribute to increased depletion or exhaustion? Briefly [explain] how demand-side forces, rather than supply-side forces, might affect the degree of depletion or the fact of exhaustion. Are economic depletion and exhaustion reversible, or irreversible? Briefly explain.

*Depletion*: A reduction in the physical volume of economically available reserves. -Depletion occurs in any period in which *production exceeds additions* to known economic reserves. -Note importantly, additions to economic reserves do not simply take place due to *new discoveries. Technological advances* may also make previously known deposits now "economic". *Exhaustion*: A resource is said to be "exhausted" when there remains no meaningful amounts that can be economically extracted. -Exhaustion is not irreversible. Technological advances can render a previously "exhausted" mine economically viable once again. *Demand-side forces* = A resource can become *more depleted or exhausted* due to demand-side phenomena, such as the *development of substitutes,* resulting in *reduced willingness to pay for the resource*

2. Most (but not all) EROI studies focus on the energy "gathering" or "production" stage of the vertical energy stream. The net energy gathered at this stage must be used to support a host of "downstream" activities. List these downstream activities that must be supported by this initially gathered net energy.

*Downstream Activities:* - Refining - Transporting - Using the energy invested in end-use "appliances"

11. What is meant by the terms "energy density" and "power density"? What is an example of a fuel with low energy density? What is an example of a fuel with high energy density? Why are these concepts important as a practical matter in the development and deployment of useful fuels, energy-using technologies, and machines?

*Energy Density:* Energy per unit of volume, area, or weight *Power Density:* Power per unit of volume, area, or weight *Fuels w/ high energy density:* Hydrogen & Natural Gas *Fuels w/ low energy density:* Lignite coal & Lead Acid batteries These concepts are important because it is in our best interest to develop useful, energy-dense technologies in order to obtain a higher amount of useful energy.

*Physical Foundations of Energy* 1. What is so special about the economics of energy that warrants a separate class focusing on the subject? Discuss the various dimensions of energy's "specialness" and in what way they correspond to the various issues encompassing "the energy problem" that invariably arise in any broad discussion of energy policy.

*Facts* - non-renewable fossil fuels - Susceptibility to market power - Insecure foreign sources of energy - environmental degradation - politically sensitive direct government involvement & regulation *Issues* - depleting fossil fuel stocks too fast ? - getting ripped off by foreign countries? - maintaining energy security ? - what should we do about degrading the environment? - What's the right amount and scope of regulation ?

4. As we best understand the physical world today, what are the three fundamental forces in nature that form the basis of energy sources in the world? What are some of the specific forms of "primary energy" associated with each fundamental force?

*Fundamental forces ("primary energies")* 1) Gravity - Falling water - Tidal 2) Nuclear - Fission - Fusion 3) Electromagnetic - Wind - Wave - Biomass - Fossil Fuels - Solar thermal - Photovoltaics

*Economics of Non-Renewable Resource Allocation: "The Theory of the Mine"* 1. In what key way does the operational context of the typical manufacturing firm (as learned in Econ 52) differ from the operational context faced by the typical mining firm? In particular, what does each model assume about intertemporal opportunity cost of using a non-renewable natural resource input.

*Manufacturing firm* has indefinitely large supply of resources. Key question is *how much can I produce today?* *Mining firm* owns a fixed and finite stock of non renewable raw materials. Key question is *should I produce this today or tomorrow?*

8. Explain what it means for an allocation of resources to be: a. Pareto Efficient/Optimal b. Pareto Inferior compared to a different allocation c. Pareto-Preferred compared to a different allocation of resources d. Pareto Non-comparable compared to a different allocation of resources.

*Pareto Efficient/ Optimal:* when you take advantage of all the available options to make someone better off without harming someone else. At a Pareto Optimal point *no one can be made better off without making someone else worse off.* *Pareto Inferior:* A state "A" is Pareto Inferior to an alternative allocation "B" if in comparing "A" to "B" it is the case that at least one person is worse off in "A" (compared to "B") and no one is better off in "A" compared to "B". *It is essentially the opposite of Pareto-Preferred* *Pareto-Preferred:* For any point "C" in a two-person utility space, all points to the northeast are Pareto Preferred to "C". That is, *at least one person is better off and no one is worse off.* *Pareto Non-comparable:* a state where people differ among one another because *some people are better off and others are worse off* (e.g., ppl contain different relative income distributions).

5. Using one example each of both "mechanical energy" and "chemical energy", explain and distinguish the concepts of potential and kinetic energy.

*Potential Energy:* = Energy stored in a body due to its position in a force field. Additional potential energy can be stored in an object by applying a force to it (e.g., lifting it to a higher position in a gravitational field.) *Chemical potential energy:* - structural arrangement of atoms and molecules (fossil fuels). - Combustion of natural gas releases potential chemical energy in the form of kinetic energy of the byproducts, CO2 and water *Kinetic Energy* = The energy contained by a moving object due to its relative motion *Mechanical kinetic energy:* A moving object like like falling water (hydro power).

10. What is the essential distinction between "power" and "energy"? State a couple of commonly used measures of each (i.e., the "units" in which power and energy are frequently measured and reported). In what way is each important in getting work done? For instance, even if you have enough energy, why isn't that enough to get all varieties of jobs done?

*Power:* the actual flow of energy *Energy:* the rate measured over a period of time. *Common measures* - Joule: amount of energy expended by a one newton force acting for one second - Watt: amount of power exerted when doing a joule of work per second - Watthour: amount of energy used in expending one watt of power for one hour (3,600 joules) - Calorie: amount of energy used to raise one gram of water by one degree C (about 4.2 joules)

13. Briefly explain the definitional difference between "primary energy" and "secondary energy". Briefly discuss how and why you would classify the following energy sources and forms as "primary" or "secondary" sources: coal, tidal flows, crude petroleum, natural gas, hydrogen, electricity, gasoline.

*Primary energy:* found in nature, no conversion is necessary *Secondary energy:* source of energy humans manipulated to produce energy quick & instant Primary sources: coal, natural gas, tidal flows, crude petroleum Secondary sources: electricity, hydrogen, gasoline

7. What is the distinction between the "rebound effect" and the "backfire" effect?

*Rebound/ take-back effect:* the *difference* of the energy use reduced, but just not as much as forecast by engineer models. *Backfire effect:* when the overall effect is to actually *increase* the amount of energy consumption

2. Use a competitive supply and demand curve diagram to illustrate how the term "economic rent" is usually used today in neoclassical economics. Explain the important elements in your diagram. What is the relationship between the terms "economic rent" and "producer surplus"? To the extent there are many different suppliers' production cost circumstances reflected in the competitive supply curve, which suppliers earn the greatest economic rents in long-run-equilibrium?

In modern economics, the term RENT is usually used to describe the portion of the social surplus received by a supplier of a good (producer surplus) or a factor of production in excess of its opportunity cost. In the long-run in perfectly competitive markets, producer/ supplier surplus converges to the same concept as economic rent. It is a surplus accruing to the supply-side of the market that is not driven away by competition among suppliers.

6. If energy and matter are each conserved, then what happens when I "produce" heat by burning a ton of coal and getting a few hundred pounds of solid waste ash? The coal was "cold" to begin with, something got hot when I burned the coal, and there appears to be a lot less matter (i.e., apparently, just the ashes) by weight following the combustion. Didn't I just convert some mass into energy? Doesn't the First Law of Thermodynamics say that mass and energy are each "conserved"? I'm confused. Please explain to me what's happening? Or, is the First Law simply incorrect?

In this case we are in an open system. The first law states that in an open system (a system that has an input, such as the heat being added to the coal), the change in internal energy equals the change of heat supplied to the system minus the amount of work done by the system. Also, coal is composed of several chemicals, including water, which are burned off.

12. Economic theory says that if markets are universal (i.e., they are used to allocate absolutely everything of any positive or negative value) and perfectly competitive, the market system will be "Pareto Satisfactory". What exactly does this mean? In what way does this theorem tend to broadly influence most American economists' thinking about how best to approach public policymaking.

It means that *perfectly* competitive markets result in an allocation of resources that is Pareto Efficient. If there is a complete initial allocation of basic property rights to all resources, perfectly competitive market transactions will drive toward a Pareto Optimal outcome. In regard to the best approach to public policy-making, the Pareto Principle does not guide policy makers into making decisions because it is not feasible to make one person better while not making someone else worse off. Note that as for income redistributional policies, we should recognize that political viewpoints will vary widely as to the extent of redistribution that is fair and desirable.

14. What is meant by "market failure"? Exactly what is it that markets are failing to accomplish when there is a "market failure"? In other words, in what way are they "failing"?

Market failures refer to cases where the market *allocates goods inefficiently.* This can be the market not taking into account the cost or benefit of an economic activity in the price of the good *(externalities),* or failing to provide enough parks for maximum social welfare *(public goods).* Take for example the energy market: The externalities of burning fossil fuel industry: pollution, energy waste. Public Good: people have access to energy Public Bad: intensity of climate change due to carbon emissions

11. Assume that you are talking to an intelligent classmate who has not taken many, if any, economics courses. Assume that this person doesn't understand much, if any, economic theory or jargon. This person states the following opinion about why future cash flows are discounted in markets: "People are simply impatient and, all else equal, they want to have everything right now. That's why markets place less than a dollar value now on a dollars worth of benefits delivered 10 years from now." Steering clear of mysterious economic jargon and using only language that an intelligent layman would understand, state your best response to your friend's observation about "impatience" being the clear explanation of why markets discount future benefits.

Markets discount future benefits because of the productivity or "usefulness" of resources. Humans are inherently selfish, and in their self serving, would like to maximize their happiness to the fullest. This manifests itself in present consumption rates, which tend to be higher thus reducing the amount of resources for future generations.

4. What is meant by monopoly rents; how do they arise? How do these "monopoly rents" the concept of "producer surplus" found in the analysis of perfectly competitive markets? How do these monopoly rents differ from the concept of "quasi-rents"? How do they differ from the concept of "user cost" in the theory of non-renewable resources?

Most modern economists would feel comfortable applying the term "monopoly rent" to refer to rents earned by the beneficiaries of monopolies created by government fiat—such as exclusive utility franchises, restrictive licenses, and even time-limited patents. The use of the term "rent" rather than "profit" seems entirely appropriate in these cases because the surplus created by these government-imposed institutions may not be eroded away by competition. Non-renewable resource rent: rent associated with the production and supply of a non-renewable resource such as oil/ gas.

6. In Professor Jurewitz's opinion, one of the key questions implicitly raised but not directly answered by the Net Energy Cliff diagram is precisely *how great an increase in total Energy Inputs will be required to maintain total Net Energy as EROI's decline.* What is the answer to this simple question? Specifically, if there is a 10% decrease in the (EROI-1) of our energy system, how much will we need to increase total Energy Input in order to maintain the same level of Net Energy made available to society?

Net Energy is simply the *product* of the variables on the x and y axes: *Net Energy= (EROI-1) x Energy Input* *FINAL ANSWER:* %Change in Energy Input >= %Change in (EROI-1) If there is a 10% decline in (EROI -1), then *society must undertake more than a 10% increase in Energy Input* in order to increase the amount of its available Net Energy.

7. As a response to the objections leveled against some of the premises of Classical Utilitarianism, Wilfred Pareto proposed his now-famous Pareto Principe for judging whether one economic state of the world should be preferred to some other state of the world. Briefly state and explain this Pareto Principle. Is it completely free of controversy (i.e., "value-free")? What is the main shortcoming of the Pareto Principle as a guide to judging whether some specific public policy should be adopted?

Pareto responded to the premises of classical utilitarianism because it was too "strong." Pareto proposed that utilitarianism be based on "weaker" premises - meaning premises that would be more practically powerful because they would more readily garner people's acceptance. *Pareto Principle:* If we can make at least one person happier (increase their utility), while not making anyone less happy, then we should do it. It is not completely free of controversy -- the Pareto principle is not designed by complexity and rather very surface level (this is the principle's shortcoming). For example: If you give the richest person $1000 more, it is probably not making anyone worse off, you are not considering the wealth distribution of the US.

4. Assume that a consumer has a relatively large amount of wealth in the form of claims to current consumption. Assume that the person can lend at a nice rate of interest, such as 20%. Further assume that the person has intertemporal consumption preferences exhibiting a completely neutral intrinsic rate of time preference. Draw a diagram in intertemporal consumption space showing the individual's optimal intertemporal allocation of resources (i.e., optimal lending pattern and intertemporal consumption pattern). What is the person's marginal rate of time preference at this optimum point? Will the person choose to consume more in the present period or in the future period? Will this choice regarding overall consumption and saving make them look "patient" of "impatient" to a casual observer? Explain why. If we asked them how much of an increment to future consumption would it take to induce them to forgo one more unit of present consumption, would we expect their response to be slightly greater than or less than 1.2 units? Why? If we focus only on their response to this latter question about their incremental willingness to borrow or lend, does their response to this "marginal" choice make them look "patient" or "impatient" to the casual observer? Briefly discuss and reconcile the seemingly contradictory (but really only superficially contradictory) evidence of "patience" and "impatience" in this example. Explain which piece of evidence is a better indicator of the "basic overall" degree of intertemporal impatience that is embedded in their overall preferences.

Patient Pref: flatter indiff. curve Impatient Pref: steeper indiff. curve

*Review of Welfare Economics (i.e., Normative Economics) and Potential Sources of Market Failure* 1. What is the difference between "positive" and "normative" economic questions?

Positive economics involves questions of "what is," whereas normative economics involves questions of "what should be," or comparative evaluations of alternative allocations of resources.

3. What do economists mean by the term "quasi-rents"? What values can they take—positive, negative, or either? Explain. Do they quasi-rents persist in long-run industry equilibria? Briefly explain.

Quasi-rents: a category of economic surplus that is rent-like, but not truly economic rent. In the face of demand-side surprises, quasi-rents is likely to also be a subcomponent of the total supply-side surplus in the short run. (short-run earning, temporary surplus over the total variable cost). The equation: quasi-rent = total revenue - total variable/ avoidable cost. Quasi-rent is more often simply called short-term "economic profit."

12. Using the basic Ramsey Savings Model (i.e., intergenerational Corn-only Economy) and Koopmans' Spaceman Model (i.e., intergenerational Hardtack-only Economy), explain how radically different normative evaluations of the practice of discounting are reached in these two very different models. Briefly discuss what these two models seem to be telling us normatively about the impact of discounting in the real world that we actually live in.

Ramsey Optimal Savings Model: in a world in which all capital is intertemporally productive (i.e., the corn economy), an optimal savings/investment plan based on maximizing the sum of discounted future utilities does not necessarily discriminate unfairly against the future. Indeed, when all capital is intertemporally productive and you are beginning at a relatively low level of wealth (i.e., with a comparatively small sack of corn), *adopting an investment plan based on a utilitarian objective function* that *does not discount future utilities* is the *less fair* course of action intertemporally. Koopmans Spaceman Model: in a world in which all capital is intertemporally unproductive (i.e., a hardtack economy), these findings are exactly reversed. In this hardtack world, discounting future utilities seems very unfair and *no discounting seems to be the more ethical basis* for establishing an optimal saving/investment plan for society

*The Positive and Normative Theories of Intertemporal Resource Allocation: Market "Discounting"—Why It Happens and What It Means* 1. What is meant by a consumer's "marginal rate of time preference"? How does this differ from the concept of an individual's "intrinsic rate of time preference?

Rather than measuring the marginal rate of substitution between two goods, we look at the rate of substitution for the consumption of ONE good in two different times periods, the PRESENT and the FUTURE. Marginal Rates of Time Preference also exhibit diminishing marginal rates of substitution MRTP = | MRS | - 1 , where MRS = ΔC1 / ΔC0

14. What is meant by the Rawlsian framework for addressing normative policy questions? What specific philosophic construct does Rawls propose for evaluating social policy that is especially appropriate to thinking about economic issues involving intergenerational fairness and equity? How does this framework relate to the issue of sustainability?

Rawlsian social welfare function would call for an inter temporal allocation of resources that would make the *least well-off generation as well off as it can be.* This calls for an inter temporal allocation, where the *present makes whatever sacrifice is necessary to make the future as well off as it can be,* but, nonetheless the present is still relatively better off than the future. Rawlsian points achieve sustainable consumption paths, but don't always achieve sustainability.

9. In the simple Hotelling model, the broad conclusion reached is that market price along the equilibrium price path will increase at an increasing rate over time. What happens to this basic conclusion if we simply assume that the mining firms face an increasing marginal cost of production as they proceed with their cumulative production to date? (assume that all other aspects of the Hotelling model hold—such as the finite choke price in demand).

The Hotelling model is useful in focusing attention on the very real and important economic concept of "user cost". However, in its simplest form, the Hotelling model invites one to conclude that mineral prices will trend ever upward, that rents will increase exponentially at the rate of interest, and that the lowest-cost resources will always be exploited first. None of these inferences will necessarily hold true in the real world for various reasons *GOLDYLOCKS SITUATION*

9. In order to address the major shortcoming of the Pareto Principle, in the 1930s economists Nicholas Kaldor and John Hicks proposed "the Kaldor-Hicks" Compensation Principle. What exactly does the Kaldor-Hicks Compensation Principle say about how to determine whether one allocation of resources is better than another? What is the main shortcoming of the Kaldor-Hicks Compensation Principle? What analytical methodology frequently used for evaluating public policies today employs the Kaldor-Hicks Compensation Principle, at least implicitly?

The Kaldor-Hicks Compensation Principle (non-compensation principle): in evaluating a potential change in the allocation of resources (ie as the result of enacting some public policy), if winners could *hypothetically* compensate the losers and still remain better off, then the change is a good one and should be undertaken. Several notes to point: 1.) There is absolutely no requirement for actual compensation (short-coming); because compensation is not mandatory, therefore probably unlikely. 2.) Kaldor-Hicks have no subtly inserted money into consideration as a proxy for utility. 3.) This offers the idea of: *Compensation Principle,* which focuses on money and the hypothetical willingness to give and to accept money as the measure of merit, while Classical Utilitarians focus on utility itself as the measure of merit. The analytical methodology frequently used today to evaluate public policy that stemmed from the Kaldor-Hicks compensation principle. *Cost-Benefit analysis is an application of the Kaldor-Hicks Compensation Principle.*

3. What is meant by "the Net Energy Cliff" ? Draw a general illustration of the net energy cliff being careful to specify what is measured on the x and y axes. What is the general "storyline" of concern that is told in conjunction with this Net Energy Cliff diagram?

The Net Energy Cliff focuses on the decrease of EROIs of fossil fuels and the transition to sources of lower EROIs such as renewable energy technologies. y-axis: %Energy Out x-axis: EROIst (a.k.a. "standardized" EROI) *Storyline*: The diagram illustrates that *high EROIs were historically achieved with minimal energy investment* from oil/gas producers, with EROIs as high as 50-100. However, as we continue to deplete these non-renewables, *we will require greater energy recovery methods, lowering the EROIs* of historical non-renewable sources like oil & gas. Finally, the diagram shows that if we are to continue consuming the same amount of useful net energy as we do today, we will have to resort to more energy sources with lower EROIs like renewable energy technologies.

10. Briefly explain Paul Samuelson's Social Welfare Approach, which is essentially a rejoinder to simply using the Kaldor-Hick Compensation Principle to sort through the relative merits of alternative public policies.

The Social Welfare Function (SWF)/ Approach recognizes the need to address inevitable weighing and comparison of efficiency effects and income distributional effects, to constitute what is *"fair."* It would be mechanically structured much like a consumer's preference function with social indifference curves exhibiting a diminishing marginal rate of substitution among the various "goods." The key problem lies in trying to garner a consensus on how the specific consensus should be mathematically calibrated. *There's no way around simply applying a subjective welfare function to evaluate outcomes -- and reasonable people will differ.*

2. On an overall theoretical macroeconomic basis, what four broad factors can be expected to affect the relationship between an economy's energy use and level of GDP?

The four main factors that can affect the relationship between energy and GDP are: 1.) Substitution between energy and other inputs 2.) Technological changes 3.) Shifts in the composition of output 4.) Shifts in the types of energy inputs

15. In order to guarantee that perfectly competitive markets will be "Pareto Satisfactory", it is generally the case that several conditions be met. What are these several conditions? (Hint: There are 5 that I listed in class.) In general, markets fail to be Pareto efficient because one or more of these assumptions are violated. Economists use various terms to refer to the market failures associated with the failure of each of these five market conditions. Name and briefly explain at least four of these reasonably distinct types and contexts of market failure, including a specific example of a real-world failure in each category. (Be sure that your examples help distinguish at least four reasonably distinct real-world categories of market failure.)

The necessary market conditions that must be met are: 1.) Universality and enforceability of exclusive private property rights 2.) Efficiency of exchange 3.) No third-party effects 4.) No non-excludable, non-rivalrous goods 5.) No non-rivalrous but excludable goods The four sources of market failure and examples: 1.) Open-access "common resources" (ex: overfishing; uneven taking of resources -- people will take more than they are given) 2.) Externalities (ex: not considering an externality of pollution, which causes harm. Externalities lead to market failure because the price equilibrium does not accurately reflect the true costs/ benefits of the product) 3.) Public Goods (ex: a movie theater, provides low rivalry and low exclusion therefore market failure) 4.) Monopoly or monopsony, moral hazard, adverse selection (ex: not having a competitive market)

5. Economists have used the term rent in some very specific ways as well as very general ways. In all of these cases, the term "rent" is used as an explanation of why a business firm might be earning a "surplus" in excess of its direct and explicit costs of production. In general, there are four different explanations that may explain this surplus and each is frequently referred to as a type of "rent". List and briefly explain these four distinct reasons that might explain some portion of a surplus being earned by a business firm operating in an extractive industry, such as petroleum production.

The term "rent" is often times misinterpreted and mischaracterized. The four distinct reasons that might explain are: 1. Those returns earned by the owner of a factor of production that are in excess of the minimum necessary to induce the supply of that factor. 2. The excess or surplus of total payments given to any factor of production over and above its 'transfer earning' or 'reservation price' as determined by its earnings in its next-best use 3. Any excess amount that a factor earns over the minimum amount needed to keep the factor in its current use 4. Any excess payment for a service, good, or property above beyond the minimum amount at which the person receiving the payment would still have agreed to provide the service, good or property. These definitions are almost identical. Note that the first 3 definitions focus on the supply of "factors of production."

6. When individuals make intertemporal resource allocation decisions based on maximizing the discounted present value of their wealth, there can be no doubt that they are valuing the receipt of one more dollar in the future at less than one more dollar in the present. This behavior certainly seems to a casual observer to be clear evidence of their "impatience", i.e., their tendency to not value their future welfare as much as their present welfare. Briefly explain in plain English why this inference about their basic intertemporal attitude is way too hasty—that is, the evidence is not sufficient to draw this conclusion. Be sure to include in your explanation the role played by the availability of intertemporally productive investment opportunities in explaining their observed "impatient" behavior.

The theory that higher spending in the present shows "impatient" behavior is only applicable to unproductive capital, i.e. capital that will serve me highest in the present Spending in the present can also incorporate productive capital, i.e. an investment, which creates opportunities or returns in the future as a result of present spending Intertemporal productive investment opportunities often can be analyzed as sacrifices in the present for gains in the future, which actually shows "patient" behavior

9. State and briefly describe the three basic alternative (but essentially mathematically identical ways) ways of evaluating whether an investment such as installing rooftop photovoltaics would be a financially beneficial investment for a person to make.

The three basic alternative ways of evaluating whether an investment is financial beneficial are: 1. *cost-benefit analysis:* tries to collapse all the multidimensional pro's and con's into a single monetary dimension for easy algebraic comparison 2. *discounted present value (dpv):* if you want to know whether you should make some sacrifice in the present in order to get some future payoff for yourself, you can answer your own question by calculating the dpv 3. *optimal social discount rate:* although driven by public policy, its focus is on large intergenerationally implications

4. What three main factors affect the energy efficiency of the application of energy in any single and isolated microeconomic application?

The three main factors that can affect the level of energy efficiency in the economy: 1.) Technological advances: technologies advances have tended to be energy-saving in the industrial sector 2.) Energy price changes 3.) Public policies promoting lower energy use per unit output: an example is utility-provided subsidies

20. What is meant by "the dictatorship of the present"? Is it inevitable; Can it be avoided? (To the extent that you have a different take on this question than offered in my "class notes", your sincere insights on this issue would be greatly appreciated.)

There is clearly "a dictatorship of the present", and there is no way to get around this fact. *The future is entirely at the mercy of the present.* The structure is very different than the issue of addressing and dealing with intragenerational equity and justice. When dealing with intragenerational equity, there is some amount of "bargaining" that can take place among members of society. In democratic societies, the poor at least have a vote, and if the situation gets bad enough, the poor can use civil unrest to make it painful for the rich to not bargain for "social peace".

16. The concepts of "excludability" and "rivalry" are helpful in understanding the similarities and distinctions among various sources of market failure (e.g., open-access resources, "public" goods, collective-consumption goods, etc). If a good or service is subject to "rivalry" in its use or consumption but it is very difficult to exclude people from using it, what kind of market failure results? Give a good example. What are the main adverse economic impacts of this kind of market failure? On the other hand, what if a good or service is not rivalrous in use or consumption, but it is not very easy to exclude people from enjoying its benefits (or detriments) once it is produced? What do we call this category of market failure? Give a good example. What are the main adverse economic impacts that are encountered if we simply rely on the market to supply such a good or service?

Under Pareto's Satisfactory--- *high exclusion and high rivalry:* markets work best such as Apple being a very competitive company (top left quadrant) *low exclusion and high rivalry:* open-access; people can easily get it, but everyone wants the fish! (bottom left quadrant) *high exclusion, low rivalry:* mixed bag; private and public clubs (top right quadrant) *low exclusion, low rivalry:* public goods; free-rider behavior; gov. provision usually needed (bottom right quadrant)

3. Carefully explain the concept of "user cost" as it applies in the theory of the mining firm. If there is a change in the productivity of alternative investment activities in the economy such that the equilibrium interest rate increases, how would you expect such a change to alter the intertemporal production plans of the individual competitive mining firm? Explain.

User cost = opportunity cost of not having it to sell at a future date because resources are finite benefit of selling today = P(today) - Marginal cost(today) benefit of selling tomorrow = P(tomorrow) - marginal cost(tomorrow) alternative investment Interest rate increases: produce now, use money to invest in other investments

15. Using a two-time period consumption-investment diagram, lay out a simple model of an economy with some corn capital and some hardtack capital, and use your diagram to illustrate the possibility that using up more than half the hardtack in the first period can be part of an optimal intergenerational investment-consumption plan even when the social welfare function is completely neutral intergenerationally.

Using up more than half the hardtack in the present can be a part of an optimal intergenerational investment-consumption plan *because* Cfuture will have a higher corn harvest, benefitting from the sacrifices of Cpresent

21. If there is a sequential "dictatorship of the present" (as there appears to be), and if "that sequential dictatorship "has worked out just fine so far", then why is there now serious reason to worry that it may not work out so fine going forward into the future from here? That is, why might it have "worked out fine so far", and why might it not continue to do so going forward? (By "worked out just fine" I mean that it has not broadly made the present generation worse off than past generations.)

We should also face the fact that the wealth we have available to us today was not transferred to us by an intergenerationally benevolent past. Instead, for the most part, the past acted largely in its own self interest and its failure to immiserate us due to resource depletion and pollution was simply due to the past's relative lack of power to do so. Clearly, they were not inclined to do any such thing maliciously, but they also simply lacked the power to do a lot of damage to us while pursuing their own self-interests. We need to recognize that this intergenerational dynamic may have now shifted very radically. *Due to our sheer scale of activity today, it is possible—if not likely—that our selfish pursuit of self-interest may be intergeneratonally unfair* to an extent not previously experienced. In short, society may likely need to confront the "dictatorship of the present" as a serious ethical issue and, for the first time in human history, explicitly *exercise forbearance in order to achieve intergenerational fairness.*

15. Briefly describe the chain of energy conversions involved in burning natural gas to spin a turbine to produce electricity to power a consumer's indoor home heating system. Briefly explain why this energy conversion chain is almost certainly a bad idea compared to a more straightforward alternative way to heat your house?

Why it's a bad idea? There are energy losses with each step. Energy is lost when it is converted into electricity, in the transmission of electricity from a power plant to your home, and then from the electricity delivered to your home and the efficiency of your appliance. If you just burned natural gas directly such as in a furnace, there is no waste because the product of burning natural gas is heat and a bit of co2, and all of the heat is used to heat the home.

3. Have econometric studies been successful in establishing a "causal" relationship between an economy's energy use and GDP level? Why is it reasonable to think that such a relationship exists based on physical laws?

Yes, studies have been successful in establishing a "casual" relationship between and economy's energy use and GDP level. The relationships include: 1.) Energy use is a necessary driver of GDP 2.) GDP drives energy use 3.) Mutual positive feedback of energy and GDP 4.) Energy and GDP are largely independent It is reasonable to think that such relationships exist based on physical laws because energy production or labor are limited by thermodynamic laws.

*Energy Use and Economic Growth* 1. Briefly discuss the relationships among the following worldwide energy-related statistics in the modern era: a. Total energy use b. Energy use per capita c. Energy use per dollar of GDP (i.e., energy intensity of GDP) d. The relationship between energy use per capita and GDP per capita e. The relationship between the growth in energy use and the growth in GDP

a. Total energy use has *increased* overall b. Energy use per capita *is highly correlated with* GDP per capita c. Energy Intensity (aka energy use per dollar) of GDP *declines somewhat* as GDP per Capita Increases d. Energy use per capita *is highly correlated with* GDP per capita. e. Although highly correlated, research shows that global energy intensity of GDP has declined quite a bit despite increases in overall energy use.

19. Each generation undertakes various activities that may be either complementary or "competitive" with the well-being of future generations. What broad categories of activities are complementary? Which activities are potentially conflicting or "competitive" with the interests of future generations?

complementary: (could be motivated by pure self-interested or some degree of altruism) -- investment in human-made capital, preservation of natural capital, technological advances(advances in basic knowledge and development of practial engineering skills) competitive -- depletion of natural resources for current consumptive uses, destruction of natural capital for "consumption" or incidental to self-interested activities(climate change)

3. If, in accordance with the First Law of Thermodynamics, energy is necessarily "conserved" and cannot be destroyed, then why do we worry about possible energy shortages?

- We often don't know how to harness energy when it is converted from one form to the next - We need to have the energy do *useful* work - Whenever we "use" energy to accomplish work, this energy is not destroyed (the First Law) but instead is transformed into a more "disordered" state (the Second Law) in which we lose the ability to use it to do further work *Class example* In concept: we could explode a bunch of gasoline - we can capture all the energy released. However, it would take more energy to do so than what you would get back, meaning you'd be a *net energy loser.*

8. In the simple "slightly modified" Hotelling model (i.e., the model with a constant unit cost of extraction), what effect does a *decrease in the per-unit mining cost* have on the length of time taken to exhaust all the mines? If, by comparison, we consider the *more realistic model in which per-unit extractions costs increase* as a result of cumulative production in each mine, what happens to the length of time taken to exhaust the total resource as a result of a reduction (i.e., a downward shift) in the cumulative cost curve? Why do these two models produce such radically different results? Briefly explain the common sense of why you get these very different results depending on the assumptions embedded in the two models. Which of the two modeling assumptions seems to you to better reflect the actual practical reality of the mining (i.e., specifically, petroleum) industry?

- decrease in per unit mining cost means *less time to exhaust all mines* - more realistic increases cause a *longer time to exhaust* - per unit extraction costs increase is more practical because we have already tapped into most of our largest oil reserves and technology hasn't been growing at a rate that would make up for the lacking reserve

8. In what three basic ways can thermal energy be transferred from one location to another? Briefly explain what is involved in each one. Give a good practical example of each category.

1) *Conduction* = Transfer of kinetic energy from one molecule to another. - Heat you feel when you touch the stove 2) *Convection* = Movement of agitated molecules through space to another location where they eventually release their energy to adjacent molecules through conduction - Molecular movement you feel above a space heater 3) *Radiation* = The transfer of heat through electromagnetic waves (not requiring any intervening molecules) - Heat you feel from a distant campfire or the sun

9. Many of the "fluxes" we observe in the natural and manmade worlds involve the conversion of energy from one form to another. For instance, electrical energy can be converted to mechanical energy by means of an electric motor. List seven distinct manmade energy conversions by indicating: (1) the nature of the initial source of energy (e.g., electrical energy), (2) the nature of the terminal source of energy (e.g., mechanical), and (3) the manmade technology involved in accomplishing the conversion (e.g., an electric motor). (Surprise: You can't use the example I just used as one of your seven examples of energy conversion.)

1) Chemical → Electrical via batteries 2) Chemical → Mechanical through metabolism 3) Gravitational → Mechanical via hydroelectric 4) Mechanical → Thermal via friction 5) Radiant → Mechanical via solar photovoltaics 6) Radiant → chemical via biofuels (photosynthesis producing ethanol) 7) Thermal → Mechanical via steam engine *extra:* Electrical → Light through Fluorescent light bulb

3. State and briefly explain at least five significant generalizations that can be gleaned from past energy transitions?

1) Historical transitions have taken time. The inertia in status quo energy systems has been large. 2) Discontinuities, surprises, and disappointments occur. 3) There have been an increasing economically available variety of primary and secondary energy sources. 4) The world energy system has become steadily more electrified. 5) The infrastructure requirements of the world energy have become increasingly complex. 6) The global energy system has become much more interconnected and interdependent. 7) Energy security is a continuing national strategic concern for most nations. (big deal with fossil fuels) 8) The world energy system has become gradually more decarbonized largely by happenstance, not by design. 9) Greater per capita energy use has not been offset by the impressive gains in energy efficiency, have used gains to become more attached to machines, thus continuing process.

2. Briefly list and explain five of the broad trends and features that have characterized the energy transition in the world during the past 300 years. What major shifts in fuels and prime movers were most salient in the 1800s? In the 1900s?

1) humans and animals(prime movers) → engines and machines 2) biomass(fuel) → fossil fuels 3) Main fuel transition: biomass(pre-industrial)→ coal → petroleum→ gas→ (the future)uranium and renewables? 4) prime mover evolution: (pre-industrial) human muscle → animal muscle → water wheels → (early industrial age)steam engines → (industrial age) electric motors→ water turbines → internal combustion engines → steam turbines → gas turbines 5) See image

4. List and very briefly describe six general categories of renewable energy production. Briefly discuss which of these six have characteristics that are most likely to result in some meaningful amount of commercialization in the coming decades. In broad terms, what are some of the main challenges usually encountered in producing renewable energy and delivering it to end-users?

1) solar radiation 2) falling water (hydroelectricity) 3) wind 4) photosynthesis (biomass) 5) wind generated ocean waves 6) ocean currents 7) ocean thermal gradients 8) geothermal 9) tidal Challenges: continuity (sun goes down at night but people still need electricity), energy storage for intertemporal availability, weather influences on energy availability, environmental disturbances from installation of renewable generation sites, some low EROI sources Meaningful (defend these): solar, tidal, etc

7. State the formula for compounding when compounding of interest payments takes place only at discrete intervals (e.g., monthly, quarterly, or annually). State the corresponding continuous mathematical formula for compounding when interest is compounded continuously (i.e., every nanosecond). Now state the two respective formulas for discrete and continuous discounting.

A = Amount deposited at time period t = 0 r = interest rate compounded every period B(t) = Value of deposit after t compounding periods B(1) = A(1 + r) B(2) = A(1 +r)(1 + r) = A(1+r)^2 B(t) = A(1 + r)^2 B = A(1 + r) B = A(1 + r/n)^n B(t)= A(1 + r/n)st = A(1 + r/n)^(n/r)rt = A [(1 + 1/w)^w]^rt Continous Compounding: B(t) = Ae^rt Continous discounting: A = DPV (B(t)) = B(t)e^rt

2. What exactly is meant by a person's "intrinsic rate of time preference"? What does it have to do with whether a person is, in some broad sense, fundamentally "patient" or "impatient"? Explain.

A person's intrinsic rate of time preference refers to the numerical value of their Marginal Rate of Time preference in the hypothetical situation in which they are equally endowed in both periods. The person in this diagram is said to have a neutral IRTP. Someone with a lot of patience will have a positive Intrinsic Rate of Time Preference, someone with very little patience will have a negative IRTP AT THE MARGIN

8. Using a simple diagram, explain why consumer theory suggests that it is highly likely that a rebound effect, or even a backfire effect, should occur in any individual microeconomic setting (such as an increase in air conditioner efficiency).

After homeowners add insulation to their attic, they are likely to make greater use of their air-conditioner because the increased insulation reduces the effective per-unit prices of AC services. You assume that you would use less of the AC, but end of using more (behavioral).

9. Explain why the additional general-equilibrium macroeconomic effects of a technological advance in energy efficiency of a particular appliance or machine seems even more likely to magnify this isolated microeconomic rebound or backfire effect.

As the operating cost of an appliance/ equipment declines, consumers/producers will likely be inclined to *increase the size and/or number* of each such appliances/ machines (due to income and substitution). For example: purchasing of larger cars, a larger or second refrigerator, installing a larger air condition.

4. Layout and explain the logic of the following simple Hotelling model illustrating the equilibrium intertemporal price trajectory of a perfectly competitive mining industry. Use the following assumptions: • A fixed amount of a non-renewable resource • Resource ownership is divided among many price-taking firms • Cost of production is constant per-pound • The consumers' demand curve is identical in all future periods • The consumers' demand curve has a finite "choke price"

Begin by noting that we are looking for the equilibrium paths for annual quantities supplied and annual prices. price and supply on one path, but we will focus on intertemporal price path. Nash equilibrium so everyone is satisfied and doesn't want to change from equilibrium. If the prices rose faster than interest rate then the firm would wait to produce later, but due to nash equilibrium we can see that Ptoday annual rate is equal to interest rate. Only this path satisfies the two necessary and sufficient conditions for the optimal path: (1) the path increases at the rate of interest, and (2) the total available product is exactly exhausted as the price reaches the choke price. Accounting for the cost of production, we actually want the net price to equal the interest rate new tech that lowers MC allows for quicker resource exhaustion

6. Explain the basic assumptions serving as the foundation of Benthamite Classical Utilitarianism and how this framework natural leads to a policy prescription favoring egalitarianism.

Bentham defined utility as usefulness, instead past economists have used it as a synonym for happiness. For example: the utility of the cup of coffee to an individual *brings happiness.* Bentham believed that social policy should be directed toward producing the greatest good, for the greatest number. This framework leads to favoring egalitarianism from these basic premises: if everyone has the same ability to convert income into happiness, and if an individual's utility of income is subject to diminishing marginal values, then the logical implication is that *social policy should pursue an equal distribution of income across all individuals* as an ideal objective. Classical Benthamite Utilitarianism can be summarized into 7 propositions: 1.) Human happiness (utility) is the only thing of value. 2.) Consumer sovereignty should reign 3.) Utility is cardinally measurable 4.) Diminishing marginal utility of income 5.) Identical impact of income on utility across all persons 6.) Utilities can be meaningfully summed across people 7.) Public policy should be directed at maximizing society's total happiness (utility)

7. In terms of converting potential chemical energy into kinetic energy, explain basically what happens when you combust a fossil fuel such as gasoline, coal, or natural gas. Explain how the total amount of energy is 'conserved" in terms of the "end-products" of this combustion process.

Burning fossil fuels and natural gas produces heat, CO2, and water. The chemical potential energy stored in the fossil fuels' molecular bonds is released by the combustion process. Burning these fossil fuels produces heat energy as a part of its "end-products" that account for the total amount of energy conserved. Note: unless this heat energy is being used for the purpose of a heater, then this type of energy is not useful unless otherwise captured for repurposing.

5. Classical Utilitarianism—and for that matter modern neoclassical utilitarianism—is based on simultaneously pursuing the "value" of "consumer sovereignty". Exactly what do economists mean by "consumer sovereignty"? Briefly explain how "consumer sovereignty" might be viewed as having both intrinsic value as a political value as well as an instrumental economic value.

Classical utilitarianism: human wellbeing (utility) is at the center of their theory of value. *Consumer sovereignty should reign*: it is the individual's own sense of happiness that matters, not some third party's evaluation of how happy someone is or should be. (This is under Classical Benthamite Utilitarianism) Consumer sovereignty has intrinsic value, political value, in addition to economic value. Public policy should be directed at maximizing society's total happiness (utility). The *social welfare function"* that comprises the objective function is to be maximized by the public policy is structured as the algebraic sum of the utility levels enjoyed by each and every member of society. In short, no other objects of value needs to be considered; individual's intrinsic happiness only matters.

18. What is the difference between cost-benefit analysis and cost-effectiveness analysis? In the limit, one of these techniques can help in pursuing "overall" or "global" optimization of resource use, whereas the other technique never seeks to accomplish anything so grand. Which technique pursues the more ambitious objective and which the more limited objective? Which one of these techniques involves "weaker" value judgments (i.e., value judgments that it would be easier to build a consensus around)? Which one of these techniques might be regarded by some (many?) economists as being over-reaching in its aspirations?

Cost benefit analysis is the process of avoiding costs while cost-effectiveness analysis is the process of achieving a goal with the least amount of sacrifice/cost. Therefore, cost-benefit analysis is a guide to *optimization,* while cost-effectiveness analysis involves *cost-minimization.* Cost-effectiveness (what are you going to do in the least amount of cost) involves weaker value judgments, and is "less ambitious, whereas cost-benefits is seen by many as over reaching their aspirations.

3. What exactly is meant by the concept of "discounted present value" (DPV)? If the prevailing interest rate during the next 10 years is expected to be 5%, write a mathematical expression stating the present value of an asset (e.g., a financial contract) which simply promises to pay the owner of the asset $1,000 ten years from today.

Discounted present value accounts for the fact that value in the future will not have the same value as it does in the present if there is an interest rate above 0% The DPV determines how much a set amount of money in the future is worth in present values In this case B sub-t = 1,000; r = 0.05; and t = 10

*"Energy Return on (Energy) Invested" (EROI) and Its implications* 1. In broad terms, what is meant by "energy return on (energy) invested" (EROI)? What is the relationship between EROI and "net energy"?

EROI: how much energy it costs in terms of *energy inputs* to find and develop more sources of useful energy. In other words: *"the energy cost of gathering energy."* EROI relative to "net energy:" The concept of "net energy" is mathematically determined by calculating EROI. This calculation is directly analogous to this concept of "economic surplus, "except that it involves only physical measures of energy rather than economic measures of "value". *Additional notes:* "net energy" at the extraction level (EROIst) is the only energy that is available to energetically drive all activities taking place at higher levels of the pyramid in the economy.

5. Some economists might criticize the EROI approach as essentially reflecting an "energy theory of value"? What do they mean by such a statement?

Economists criticize the EROI approach as something that ascribes an "overriding source of value to a single input in the production process. (Jurewitz 16)." These economists argue that an EROI approach as an "energy theory of value" does not adequately ground economic analysis in the physical realities of natural resource depletion and energy depletion.

10. What is the IPAT model and how does it help to organize our thinking about whether technological improvements in energy efficiency will lead to increases or decreases in overall energy use?

Ehrlich's IPAT Model is a useful framework for thinking about the potential *impact* of increased energy efficiency on energy use. Impact = Population x Affluence x Technology

5. Who was Stanley Jevons and what theory of his has become known as "the Jevons Paradox"?

English economist, William Stanley Jevons wrote The Coal Question (1865), noting *the depletion of coal would have serious impacts on the growth of English GDP.* *The Jevons Paradox:* technological progress can increase the efficiency of the resource, but the rate of consumption can increase due to demand.

7. In terms of specific "micro" applications of EROI analyses to specific energy production or conversions, *what analytical hazard is encountered due to the fact that all energy BTUs are not of equal "quality"* (i.e., economic value and usefulness)? Use a good *example illustrating and explain the potential hazards of simply naively applying an EROI analysis* to some energy production or conversion process (such as electricity production from coal, or tar sands development using various energy sources to "free" the tar sands) if we simply focus on BTU inputs and outputs without taking note of the "quality" of these BTUs.

Example: 2.0 BTUs of raw tar sands are burned originally to gather 1.0 BTUs suitable for transporting to a refinery. Calculating a mechanical EROI for this process would lead you to conclude that it is a bad idea because it has an EROI of 0.5, resulting in negative "net energy". HOWEVER the *quality of the energy source used is inferior in to the energy substance produced.* The two original barrels of raw tar-sands may have no alternative use - essentially a value of zero that is not captured in the EROI analyses of BTUs- while the one barrel of extracted ready-to-refine tar-sands crude oil is quite valuable. Additional notes: Of course, it makes sense to ask whether the raw tar sands instead ought to be saved rather than burned in anticipation of tech advances that may provide better ways to loosen up the tar sands. Likewise, it would make sense to ask whether it would be better to use some alternative source of heat to loosen up the tar sands.

5. Carefully explain why, in an industry extracting a non-renewable resource, even if the industry is full of small "price-taking" firms and there is free exit and entry, *price will not* generally be *simply equal to the "direct" marginal cost of production* alone (i.e., costs reflective of "out of pocket" expenditures on labor, raw materials, and capital) of extraction even if the industry is in a long-run equilibrium. What do economists call this extra component of "cost"? (Actually, they call it by several names. State as many of these names as you can think of.) Is this cost an "out of pocket" cost or some other kind of "cost" (i.e., by "cost" I mean a reason for not currently producing incrementally more at the margin in the current period)? Carefully explain.

Extra component of cost: - Market externalities associated with increasing extraction costs P ≠ LRMC in Long-Run equilibrium b/c per-unit cost of production *increases* b/c available stocks of non-renewables *decrease* over time

3. Briefly state "Hume's Law" and explain its relevance to the study of normative economics?

Hume's law: A normative conclusion cannot logically stand only on foundation of purely factual, positive premises. For example, Today is Tuesday, therefore I should go to my econ class -- would not be a convincing case to go to class. Instead, "today is Tuesday, and I VALUE learning about energy economics, therefore I will go to class. It is relevant to the study of normative economics because giving good policy advice can be constructively refined and improved, but it will never involve simply issues of positive science. Acknowledging Hume's law allows us to debate constructively at the proper level, and focus on the truly relevant issues in contention. Note that Hume's law implies "practical strength," meaning it rests on the breadth of the consensus that it can garner people's support.

17. Even if a market system is perfectly allocatively efficient (i.e., Pareto efficient), the system might "fail" in some broader sense to bring about a social welfare optimum for reasons other than allocative inefficiency. In what additional basic way might a market system "fail" under this broader definition of market failure? (For instance, even if markets were to allocate a finite non-renewable resource "efficiently", what broader policy issues would still be raised by the way in which markets allocate such a finite resource?)

If markets were to allocate finite non-renewable resource efficiently, some broader policy issues that should be raised are: - environmental degradation (externalities) - "economically" depleted - monopoly of resources - resources availability (insecurity of foreign sources)