Lecture Notes Economics of Sustainability K Foster, CCNY, Spring 2014 Table of Contents Introduction .................................................................................................................................................................... 4 Basics ......................................................................................................................................5 Define Economics ............................................................................................................................................................ 6 Commodities and Goods/Services .......................................................................................... 6 Basics of Supply and Demand Curves ...................................................................................... 7 Analyzing Supply and Demand Curves .................................................................................... 7 Individual Demand to Market Demand.................................................................................. 10 Intertemporal Choice and Discount Rates ............................................................................. 10 Rate of Compounding ........................................................................................................... 12 Production Possibility Frontier (PPF) .............................................................................................................................. 14 Indifference Curves ......................................................................................................................................................... 15 Optimal Choice.............................................................................................................................................................. 20 Consumer Choice and Fees/Taxes ................................................................................................................................. 22 Appendix: A reminder about Percents and Growth Rates ............................................................................................... 23 Important Conditions for Competition ........................................................................................................................... 27 Markets ................................................................................................................................. 27 Externalities ......................................................................................................................... 28 Rival and/or Excludable Goods versus Pure Public Goods ...................................................... 32 Free Rider Problem ............................................................................................................... 33 Coase Theorem ............................................................................................................................................................. 40 Tragedy of the Commons ......................................................................................................45 Sustainability ................................................................................................................................................................. 48 Sustainability and Sustainable Development ........................................................................ 48 Sustainability and Economic Growth.................................................................................... 49 Social Welfare .......................................................................................................................50 Measuring Sustainability ....................................................................................................... 53 Short Review of Production ............................................................................................................................................54 Firms Choosing How to Produce ...........................................................................................54 One Input ..............................................................................................................................54 More than One Input .............................................................................................................56 Short Run vs Long Run ............................................................................................................................................ 57 Profit Maximization ............................................................................................................... 57 Profit Maximization with One Input ........................................................................................................................ 57 Profit Maximization with Multiple Inputs ..............................................................................58 Cost Minimization/Profit Maximization ..................................................................................................................59 Marginal Revenue .................................................................................................................59 Hotelling on Resource Extraction ......................................................................................... 60 Prisoner's Dilemma and Cartels ............................................................................................. 61 Production Externalities ........................................................................................................ 61 Hicks-Marshall rules of Derived Demand: ............................................................................. 64 Supplementary Material for Advanced students ...................................................................65 Choice of Dumping or Safe Disposal...................................................................................... 71 Regulation of Pollution ................................................................................................................................................... 73 Fees & Tradable Permits ................................................................................................................................................. 73 Tradable Permits ................................................................................................................... 73 When Costs & Benefits are Imperfectly Known (i.e. The Real World…).................................. 77 Extreme Case 1: Threshold effects of pollution ....................................................................................................... 78 Extreme Case 2: Constant Marginal Damages ........................................................................................................ 79 Case 3: MD steeper than MC .................................................................................................................................. 82 Case 4: MD flatter than MC ..................................................................................................................................... 83 Details of Fees and Permits .................................................................................................................................... 84 Pollution Over Time ................................................................................................................................................85 Regulation through Liability ................................................................................................. 86 Regulation through Insurance ............................................................................................... 87 Valuation of Life .................................................................................................................... 87 Risk & Uncertainty ......................................................................................................................................................... 88 Expected Surplus ................................................................................................................................................... 89 Option Price ........................................................................................................................................................... 89 Irreversibility and Precautionary Principle .............................................................................................................. 89 Actual Behavior of People making Choices under Uncertainty ............................................................................... 89 Basics of Oil ................................................................................................................................................................... 92 Background on Global Climate Change ......................................................................................................................... 96 Social Cost of Carbon ................................................................................................................................................... 103 Financial Markets ......................................................................................................................................................... 104 Financial Markets and Securities 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