After reading this chapter, you should be able to: Explain the nature of economic rent and how it is determined; describe the loanable funds theory of interest rates; demonstrate how interest rates relate to the time-value of money and vary based on risk, maturity, loan size, and taxability; relate why economic profits occur, and how profits, along with losses, allocate resources among alternative uses; list the share of . earnings received by each of the factors of production. | Chapter 19 The Environment Chapter Outline HOW CLEAN IS CLEAN ENOUGH? THE EXTERNALITIES APPROACH THE PROPERTY RIGHTS APPROACH ENVIRONMENTAL PROBLEMS AND THEIR ECONOMIC SOLUTIONS How Clean is Clean Enough Economists answer most “how much is enough” questions with the same answer: “until the marginal benefit equals the marginal cost.” The right level of environmental cleanliness is achieved when the value of cleaning the environment a little more equals the cost of doing so. The Dirty Room Example Cleaning your room (dorm room or your own bedroom) can be done to many degrees A short time can be spent getting things off the floor (high marginal benefit, low marginal cost). More time can be spent with vacuuming and straightening (moderate marginal benefit, moderate marginal cost). Even more time can be spent deep cleaning, removing stains from carpets, dusting all shelves and moving furniture so as to clean behind them (for most low marginal benefit and high marginal cost.) Modeling . | Chapter 19 The Environment Chapter Outline HOW CLEAN IS CLEAN ENOUGH? THE EXTERNALITIES APPROACH THE PROPERTY RIGHTS APPROACH ENVIRONMENTAL PROBLEMS AND THEIR ECONOMIC SOLUTIONS How Clean is Clean Enough Economists answer most “how much is enough” questions with the same answer: “until the marginal benefit equals the marginal cost.” The right level of environmental cleanliness is achieved when the value of cleaning the environment a little more equals the cost of doing so. The Dirty Room Example Cleaning your room (dorm room or your own bedroom) can be done to many degrees A short time can be spent getting things off the floor (high marginal benefit, low marginal cost). More time can be spent with vacuuming and straightening (moderate marginal benefit, moderate marginal cost). Even more time can be spent deep cleaning, removing stains from carpets, dusting all shelves and moving furniture so as to clean behind them (for most low marginal benefit and high marginal cost.) Modeling Environmental Cleanup Marginal Benefit Marginal Cost Environmental Quality Marginal Cost Marginal Benefit EQ* The Externalities Approach Externalities are the effects of a transaction that hurt or help people who are not a part of that transaction. When a product affects someone other than the consumer of producer in a negative way, such as pollution, economists suggest that the market has failed. When the Market Works for Everyone Supply Demand Q* P* P Q/t A B C 0 Value to the Consumer: 0ACQ* Consumers Pay Producers: OP*CQ* The Variable Cost to Producers: OBCQ* Consumer Surplus: P*AC Producer Surplus: BP*C When Externalities are Present If there are externalities then there is overproduction of a good. The total cost of a good to society (called social cost) includes the costs of production incurred by the firm as well as the external costs. When the Market Does Not Work for Everyone SMarginal Cost D(Marginal Benefit) Q* P* P Q/t 0 Social Cost External Cost Q’ P’ The Property Rights .
