exam 3 review

optimal pollution

• what is appropriate level of waste?

• how to achieve that level (who has to reduce how much?)

• identify efficient levels of pollution

• discuss market levels of pollution

• demonstrate how policy can reconcile

efficient allocation of a fund pollutant

efficiency difficult, use cost-effectiveness criteria

• select Q based on other criteria– safe for human / ecological health

• then, how to allocate responsibility for meeting this level?

• use cost-effectiveness criterion– not necessarily optimal, but minimizes cost given

some level Q

cost-effective allocation: example

• assume 2 sources currently emitting 30 units

• reduce to 15 units

• how to allocate reduction between 2 sources?

cost-effective reductions

equal MAC

• cost of achieving given reduction in emissions will be minimized if and only if MC of control (abatement) equal across emitters

• what policy instrument to achieve equality?

1. emissions standards

2. emissions charges

3. emissions trading

1. emissions standards

• command and control

• equal reduction?

• not cost-effective

• first source lower cost

• total costs increase if both forced to clean up same

2. emission charges (taxes)

3. emissions permit system

sample question

• with the aid of a graph illustrate optimal pollution abatement if MAC = 10 – E with a per unit tax of $5.

• how would this change if MAC = 8 – E?

energy: efficient vs. market outcomesair pollution and climate policy

• Efficiency of C & C policy?– emissions standard set according to health

“threshold” – protect the most sensitive members of popn

• But adverse health effects are occurring at pollution levels lower than the ambient standard

other problems

• space– no account for number of people exposed– sensitivity of local ecology– costs of compliance in various areas

• time– concentrations are important– standards based on averages– constant levels of control

• exposure– indoor pollutants important too

better to use other 2 instruments:charges vs. trading

• Emissions trading– Initial allocation matters– Free vs. auction– EU experience

• Windfall profits to big polluters

– RGGE in NE 2008• 10 NE states; emissions capped starting 2009

• Emission charges– Tax damage costs per unit– Double dividend

population

• model of population growth on development

• model of development on population growth

• microeconomic theory of fertility

model of population on development

• O = LX– O: output– L: number of workers– X: output per worker

• O/P = (L/P)X…output per capita– P: population

output per capita

• output per capita determined by– share of population in labor force (L/P)– output per worker (X)

• whatever affects these 2 factors is population growth’s effect on development

factor 1: share of population in labor force

• changes in age distribution– rapid growth means higher percentage of young

people• large supply of people too young to work

– slow growth means high % of older people• retirement effect

• high pop growth retards per capita economic growth by decreasing % of pop in labor force

factor 2: output per worker

• most common productivity enhancer: accumulation of capital

• is there a connection between pop growth and cap accumulation?

• 2 connections:– more savings leads to more capital

• fast growing pop save less

– law of diminishing marginal productivity• with fixed factor (land), adding more labor diminishes

productivity

could pop growth enhance output per capita?technological progress / economies of scale

model of development on population

• theory of demographic transition: as nations develop they eventually reach a point where birthrates fall

• stage 1: prior to industrialization, birthrates / death rates stable

• stage 2: after industrialization, lower death rates (same birthrates)

• stage 3: falling birthrates

demographic transition

microeconomic theory of fertility

changing desired family size

• decreased benefits– shift from agriculture to industry – less demand for children as social security– decrease in infant mortality

• increased costs– increased opportunity cost of mother’s time (more

educational and labor mkt opportunities)– scarcity / cost of housing– cost of education