SOS 325: Economics of Sustainability

Lecture FER (2020-12-01): Final Exam Review

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 3 Dec 2020 09:39:00 -0800

This lecture session is meant to provide a student-driven, cumulative review of topics that could serve as a study guide for the upcoming final exam. Most topics asked by the students relate to the economic analysis of the management of renewable and non-renewable resources.

Whiteboard notes from this lecture can be found at: https://www.dropbox.com/s/nx6995mfcjxcha8/LectureFER-2020-12-01-Final_Exam_Review-Notes.pdf?dl=0

Lecture E1/E2 (2020-11-24): Principles of Market-Based Environmental Policy

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 24 Nov 2020 19:00:00 -0800

In this wrap-up lecture, we briefly cover government policy approaches for mitigating sustainability problems. We start with the Coasean ideal (Coase Theorem and Coasean Bargaining) where government has little-to-no regulatory effect and socially efficient outcomes are still achieved. We then discuss problems with the Coasean approach (appreciable transaction costs) and discuss alternative government approaches -- including prescriptive regulations (command and control) like technology and performance standards, and information-based approaches like mandatory right-to-know laws and voluntary eco-labeling strategies. That then allows us to discuss Pigouvian approaches that internalize negative externalities with taxes (e.g., emissions taxes). We discuss how these Pigouvian taxes are corrective (not distortionary) and may even have a double-dividend effect. We close with a brief discussion of cap-and-trade (allowance trading), which achieves the same outcome as Pigouvian taxes by creating a Coase-like market for allowances.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/69qjs1c5e0p46yl/LectureE1E2-2020-11-24-Principles_of_Mkt-Based_Env_Policy.pdf?dl=0

Lecture D7/E1 (2020-11-19): Economics of Renewable Natural Resources, Part 5 - Fisheries

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 19 Nov 2020 15:53:00 -0800

In this lecture, we continue to discuss the economics of fisheries -- private and open-access. The lecture reminds us of the logistic growth characteristics of fish populations and then presents a bio-economic model relating effort to harvest yield assuming that a fishery has reached steady-state. This bioeconomic fishery model allows us to predict that, for a private fishery, the fishery will never be biologically overfished. However, an open-access fishery may be both economically and biologically overfished. We then discuss how a common property fishery might be economically overfished but will at least be sustainable (i.e., not biologically overfished) in many cases. We end the lecture with a preview of the last lecture of new content for the semester -- a comment on the Pigouvian and Coasean approaches for thinking about environmental economics (and internalizing negative externalities due to environmental damages from production).

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/qzabkwhedxk1xvd/LectureD8E1-2020-11-19-Economics_of_Renewable_Natural_Resources-Part_5-Fisheries.pdf?dl=0

Lecture D7 (2020-11-17): Economics of Renewable Natural Resources, Part 4 - Forest Economics

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 17 Nov 2020 15:33:00 -0800

In this lecture, we close our discussion of forest/timber economics by putting an "economic rent" lens on the different rotations -- the biological rotation, the Wicksell Rotation, and the Faustmann Rotation (with a model of non-timber benefits). With an increase in opportunity costs, we see an increase in economic rent (which ends up reducing the amount of timber supplied to the market for the same price). This economic rent compensates for the lost opportunity. We then finish the discussion with a pivot to fisheries, which we will have to finish covering next lecture due to time constraints on this lecture.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/8mdl0u26yxh01td/LectureD7-2020-11-17-Economics_of_Renewable_Natural_Resources-Part_4.pdf?dl=0

Lecture D6 (2020-11-12): Economics of Renewable Natural Resources, Part 3 - Forest Economics

ted@tedpavlic.com (Theodore P. Pavlic) — Fri, 13 Nov 2020 20:10:00 -0800

This lecture continues the exploration into the quantitative analysis of renewable natural resource management. We review the mean-annual increment (MAI) maximizing "biological rotation" as a model for finding a non-zero threshold for cutting when year-to-year growth drops sufficiently low. We then pivot off of MAI maximization to the Wicksell Rotation, which uses the prevailing interest rate as a threshold for critical growth rates. We then grow the Wicksell Rotation into the Faustmann Rotation, which includes the site value as well. We conclude with adding in the effect of other benefits of the natural resource (such as the non-timber benefits provided by maintaining old-growth habitat). That provides the opportunity to discuss methods for internalizing costs of habitat loss, with a brief introduction to Pigouvian and Coasean perspectives on the subject.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/96kprx6wxfn7jyq/LectureD6-2020-11-12-Economics_of_Renewable_Natural_Resources-Part_3.pdf?dl=0

Lecture D5 (2020-11-10): Economics of Renewable Natural Resources, Part 2 - Forest Economics

ted@tedpavlic.com (Theodore P. Pavlic) — Wed, 11 Nov 2020 20:43:00 -0800

We continue to discuss the economics of natural resources in this lecture, with a particular focus on timber rotations. In the previous lecture, we introduced the biological rotation, which maximizes the mean annual increment (MAI). In this lecture, we introduce the time-value of money with the Wicksell and Faustmann Rotations (where the latter adds in the effect of opportunity cost from alternative uses of the site). We will continue this discuss in the next lecture, when we also add in habitat value.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/iy1qu95cxv61tgv/LectureD5-2020-11-10-Economics_of_Renewable_Natural_Resources-Part_2.pdf?dl=0

Lecture D4 (2020-11-05): Economics of Renewable Resources, Part 1 - Forest Economics

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 5 Nov 2020 13:52:00 -0800

In this lecture, we review an example calculation of the efficient quantities to extract from a private, non-renewable resource (which follow's the prediction of Hotelling's Rule) and use that to motivate our introduction to modeling of renewable resource management. We start our discussion of renewable resources with an optimal aging problem where a private landowner determines which rotation (period before harvesting and then repeating) to use in order to maximize the total volume of wood produced by the woodlot. This results in the "biological rotation" (which maximizes the mean annual increment, MAI). In the next lecture, we will add in the time value of money (Wicksell Rotation) and alternative uses for the land (Faustmann Rotation) and alternative uses for the natural resource itself (like maintaining species habitat).

Whiteboard notes from this lecture can be found at: https://www.dropbox.com/s/kseey7bpl4e9tbx/LectureD4-2020-11-05-Economics_of_Renewable_Natural_Resources-Part_1.pdf?dl=0

Lecture D2/D3 (2020-11-03): Economics of Nonrenewable Natural Resources, Part 2

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 3 Nov 2020 19:57:00 -0800

In this lecture, we start to work through a quantitative analysis of the management of privately owned, non-renewable natural resources. We derive the intertemporal equimarginal principle result (which comes from maximizing net present value) and show how follows Hotelling's Rule about the rise in scarcity rent with interest rate over time. We work a numerical example for the 2-period efficient extraction quantities as well.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/gcmv5no5rbp8cz0/LectureD2-2020-11-03-Econ_of_Nonrenewable_Resources-Part_2.pdf?dl=0

Lecture D1 (2020-10-27): Economics of Nonrenewable Natural Resources, Part 1

ted@tedpavlic.com (Theodore P. Pavlic) — Wed, 28 Oct 2020 14:53:00 -0700

In this lecture, we introduce economic models for managing private, nonrenewable natural resources (such as oil). We start the lecture with the general picture of viewing natural resource allocations as a kind of capital asset portfolio management problem. We then outline the qualitative features we would expect in a quantitative analysis of management of a private, non-renewable resource. This allows us to discuss "scarcity rent" (marginal user cost), price paths of nonrenewable resources, and Hotelling's Rule. We will take on a more mathematical treatment of these topics in the next lecture.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/e4u2wbmzmdcqrzy/LectureD1-2020-10-27-Econ_of_Nonrenewable_Resources-Part_1.pdf?dl=0

Lecture MER (2020-10-20): Midterm Exam Review

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 20 Oct 2020 20:22:00 -0700

In this lecture, questions are answers in preparation for the upcoming midterm exam.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/s4dyvv37h95p5qq/LectureMER-2020-10-20-Midterm_review-Notes.pdf?dl=0

Lecture C8 (2020-10-15): Market Failures in the Environmental Realm, Part 3

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 15 Oct 2020 17:53:00 -0700

In this lecture, we continue our discussion of an economic analysis of Collective Action Problems related to sustainability. We start with a conventional market-based analysis of an open-access resource (such as an open-access fishery). After demonstrating that the real question is less about how much individuals consume but more about which individuals choose to take part in consumption, we pivot to a basic introduction to game theory. This involves the Prisoner's Dilemma (as a general framework for thinking about Collective Action Problems) and then the Hawk-Dove Game (or Game of Chicken) as a case better suited to model open-access problems like the fishery (or highways at rush hour). We describe briefly that the stag hunt could be used to model public goods games with strong positive externalities (stronger than the positive externalities with the Prisoner's Dilemma), but we stop our detailed discussion after the anti-coordination games.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/nsfdzd70pqdv742/LectureC8-2020-10-15-Mkt_Failures_in_Env_Realm_P3-CAP_and_Game_Thy.pdf?dl=0

Lecture C7b (2020-10-13) - Market Analysis of Externalities - Study Session

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 13 Oct 2020 17:16:00 -0700

This auxiliary lecture walks through two numerical examples of using supply and demand curves to analyze the effect of negative externalities and positive externalities (as in a public goods problem). Both the market equilibrium and the socially efficient solution are calculated and metrics of how they differ (such as deadweight loss) as well.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/rnanqam9km7lomy/LectureC7b-2020-10-13-Market_Analysis_of_Externalities-Study_Session.pdf?dl=0

Lecture C7 (2020-10-08): Market Failures in the Environmental Realm, Part 2

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 8 Oct 2020 21:23:00 -0700

This lecture focuses on microeconomic modeling of market failures resulting from negative and positive externalities (with the aim of applying these concepts to environmental and sustainability contexts). We cover marginal damage (negative externalities) as well as public goods (positive externalities) and an introduction to open-access resources (common pool resources and the tragedy of the commons).

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/wn2jbapl09iomdi/LectureC7-2020-10-08-Market_Failures_in_Environmental_Realm-Part_2.pdf?dl=0

Lecture C6 (2020-10-06): Market Failures in the Environmental Realm

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 6 Oct 2020 17:50:00 -0700

In this lecture, we revisit the Kaldor–Hicks efficiency perspective on markets and the three conditions that ensure that market equilibria lead to socially efficient allocations of goods and services. This allows us to discuss competitive markets, markets with information symmetry, and complete markets, and how these violations of these three market conditions are depicted with supply and demand curves. We specifically discuss these market failures as they relate to sustainability and environmental economics.

Whiteboard notes for this lecture can be found at: https://www.dropbox.com/s/tympsbtro8kcah8/LectureC6-2020-10-06-Market_Failures_in_Environmental_Realm.pdf?dl=0

Lecture C5 (2020-10-01): Paretian Perspective and Market Efficiency

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 1 Oct 2020 21:22:00 -0700

In this lecture, we pivot from cardinal social welfare to a Paretian perspective where we use Pareto optimality to rank outcomes in terms of their aggregate social welfare. To make this Paretian perspective practical, we introduce Kaldor-Hicks "potential Pareto" improvements. This allows us to assess which market equilibria are socially efficient (in the Kaldor-Hicks sense).

Whiteboard notes for this lecture can be found at:
https://www.dropbox.com/s/sn425orkqjbyziv/LectureC5-2020-10-01-Paretian_Perspective_and_Mkt_Efficiency-Notes.pdf?dl=0

Lecture C4 (2020-09-29): Cardinal Social Welfare

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 29 Sep 2020 20:07:00 -0700

In this lecture, we visit the foundations of different notions of utility. The lecture starts with a discussion of ordinal utility at the individual level and discusses a common example (from the St. Petersburg Paradox) that suggests cardinal utility may be better at predicting individual human behavior. We then describe how cardinal utility allows for an absolute scale on which to combine individual utilities into social welfare functions. The bulk of the lecture describes different features of classes of social welfare function (Benthamite (Utilitarian), Rawlsian (minimax), Egalitarian, and Cobb--Douglas). Ultimately, we hint at how the subjectivity underlying the choice of social-welfare function suggests that perhaps an ordinal framework (such as Pareto optimality) may provide for more defensible ways to model social welfare when discussing economic markets.

Lecture C3 (2020-09-24): Benefits and Costs Across Individuals

ted@tedpavlic.com (Theodore P. Pavlic) — Wed, 23 Sep 2020 23:10:00 -0700

In this lecture, we go into detail about the graphical solution to maximizing the intertemporal social welfare function (i.e., balancing present and future benefits and costs consistent with temporal discounting). We then pivot to considering social welfare functions that balance across individuals instead of across times. We use these social welfare functions to motivate why another framework is needed to be more practical, which will allow us to discuss Pareto optimality in the next lecture.

Lecture C2 (2020-09-22): Aggregating Benefits and Costs Across Time

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 22 Sep 2020 16:10:00 -0700

In this lecture, we review the basic shape of benefit and cost functions and how they relate to the analysis of marginal benefit and marginal cost. We then pivot to thinking about the effect of time and temporal discounting on benefits and costs. That allows us to move from utility functions (with their indifference curves) to social welfare functions. The budget constraint line from consumer choice theory is replaced by the production possibility frontier (PPF), and a new version of the equimarginal principle is introduced -- where the marginal rate of transformation (MRT) equals the marginal rate of substitution (MRS). This is all done graphically. In future lectures, we will give more concrete examples of solving for optimal resource allocation across time.

Lecture C1 (2020-09-17): Economic Efficiency and Environmental Protection

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 17 Sep 2020 16:44:00 -0700

In this lecture, we begin to connect the microeconomics foundations from the previous lecture to topics related to sustainability – specifically pollution abatement and conservation problems. We introduce the basic framework of benefits and costs and how maximal net benefits occur when marginal costs and marginal benefits are equal (the equimarginal principle). We discuss the basic concave shape of benefits curves and convex shape of cost curves and how they relate to the typical ordering of intervention strategies in sustainability.

Lecture B5A (2020-09-15): Some Demanding Exercises

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 15 Sep 2020 15:17:00 -0700

This lecture covers some concrete examples of calculations related to demand curves, demand functions, and inverse demand functions. It covers price elasticity of demand calculations as well as consumer surplus calculations. There is a discussion of the meaning of these quantities as well.

Lecture B5 (2020-09-10): Working with Demand Curves

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 10 Sep 2020 17:49:00 -0700

In this lecture, we dig deeper into demand curves (and the related topics of the demand function and inverse demand function). We discuss normal goods, inferior goods, Giffen goods, and Veblen goods. We then start to introduce consumer surplus and elasticity (with a focus on Price Elasticity of Demand, PED).

Lecture B4 (2020-09-08): From Indifference to Demand

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 8 Sep 2020 16:12:00 -0700

In this lecture, we round out our discussion of the shape of indifference curves and marginal-rate of substitution. We cover not only indifference curves for multiple goods but also consider indifference curves when there is a mixture of goods and bads. We then pivot back to consumer choice theory and the role of price and income. That allows us to introduce so-called "normal goods" and "inferior goods." We close with a hint of our future work using demand curves (and demand and inverse demand functions) to do calculations related to consumer choice.

Lecture B3 (2020-09-03): Making Utility More Useful

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 3 Sep 2020 17:11:00 -0700

In this lecture, we continue to discuss how to interpret the shape of different indifference curves. Indifference curves are the level sets of multi-commodity utility functions, and thus understanding these shapes helps us model the different ways that individuals can prefer one option to another. We close the lecture with a discussion of how the slope of the indifference curve (marginal rate of substitution, MRS) relates to the budget constraint line and how a consumer with a mismatch between the MRS and the budget constraint line will (for goods with diminishing marginal returns) trade goods until the two are equal. This "equi-marginal principle" is a property that maximizes utility in multi-commodity situations where two goods both have diminishing marginal returns.

Lecture B2 (2020-09-01): Shaping Up Understanding of Utility and Indifference

ted@tedpavlic.com (Theodore P. Pavlic) — Tue, 1 Sep 2020 17:14:00 -0700

In this lecture, we work toward better understanding the meaning behind the shape of different utility functions and indifference curves.

Lecture B1 (2020-08-27): Foundations of Economics for Sustainability

ted@tedpavlic.com (Theodore P. Pavlic) — Thu, 27 Aug 2020 17:02:00 -0700

In this lecture, we introduce the moral justifications for economic modeling of sustainability problems, and then we transition to describing fundamentals of consumer choice theory (indifference curves, utility functions, budget constraints). This involves introducing Pareto optimality (Pareto movements and improvements, Pareto-efficient sets), which we will return to as we discuss social welfare later in the course.