Econ. 5250 classes of Fall 2021

These videos begin with a blank portion recorded before the lecture begins. 


August 23: Discussion of the syllabus, beginning at minute 4:25 and going to minute 40:00.  Chapter 4: External cost; externalities; Adam Smith's Invisible Hand and sufficient conditions for laissez faire policies to be optimal. Figure 4.1: marginal external cost and marginal net private benefit. Economics of scale and diseconomies of scale. Brief comments on a polluting monopolist and the Theory of the Second Best.


August 25: Begins at minute 3. More on economies of scale. The socially optimal level of pollution. Competitive firm total revenue; total cost curve (economies of scale gain); marginal revenue and marginal cost; marginal profit. At minute 40, a new screen with TR and TC, then MR and MC, and marginal profit, completing the analysis of the polluting firm. The consumer of the polluting product: what is the consumer's value of consumption? It is more than the consumer's payment. It is the consumer surplus (area under the demand curve).


Why the MNPB curve is not just the marginal profit curve (despite what your book implicitly thinks). The MNPB curve is actually marginal profit plus marginal consumer surplus. Both of these are zero at "Qπ"; between zero and Qπ, both have a negative slope, so their sum, which is MNPB, has a negative slope. MNPB is zero at Qπ.


August 30: First problem with consumer surplus as a measure of value: starting from Q=0, as Q increases via auctions, the consumer's disposable income declines, causing the demand curve to shift down (assuming the good is a normal good).  This results in "willingness (and ability) to pay" (WATP) being smaller than consumer surplus.  A second value of Q is the "willingness to accept" other goods as compensation for not receiving Q (instead staying at Q=0).  This "WTA" is not usually equal to consumer surplus either.  WTA is usually larger than WATP because WATP is constrained by income and WTA is not constrained by income.


A third value of Q is obtained by starting at Q (not at zero), and obtaining the consumer's WTA as a "buying auctioneer" (not a "selling auctioneer") buys Q from the consumer in a series of transactions. After each transaction, the consumer has more money than before, causing the demand curve to shift up.  This results in a WTA which is larger than consumer surplus.  A fourth value of Q is the consumer's WATP to avoid quantity falling from Q down to zero.


So Q has two values, one a WATP and one a WTA, if you start at Q=0 and consider acquiring Q.  It has another two values, one a WATP and one a WTA, if you start at Q and consider getting rid of it.


But there are more than just two potential starting points, zero and Q.  You could start at Q/2, and generate a WATP and WTA for Q from Q/2.  You could start at 0.1234 Q, and generate a WATP and WTA for Q from there.  Each starting point will generate a different WATP and WTA for Q, and it can be shown that each starting point will generate a different "marginal WATP" and "marginal WTA" for the Qth unit.  There are an infinite number of potential starting points, and therefore an infinite number of "marginal WATP for the Qth unit" and an infinite number of "marginal WTA for the Qth unit."


In practice, then, the notion of one single objective  "marginal value of the Qth unit" has to be abandoned.  In its place should go a subjective "marginal value of the Qth unit," determined by the ethical beliefs of each individual.  Coming up with a social "marginal value of the Qth unit" involves combining, in some manner, each person's opinion about what the "marginal value of the Qth unit" ought to be.


The above concerned the "value" of a marketed good.  It was natural for the demand curve to play a role in that discussion.  How about the "value" of a non-marketed good, such as pollution?  It will also have a WATP and a WTA, but showing this can't use a demand curve because demand curves do not pertain to non-marketed goods.  (A demand curve is a function of price and non-marketed goods do not have prices.)  An indifference curve map is used to show that a non-marketed good has a WATP and a WTA.  Indeed a non-marketed good has many WATP's and WTA's, depending on how large an amount of other goods the consumer starts with.


September 1: A review of the class so far. We will interpret MEC and MNPB as being subjective moral social judments rather than objective valuations.  That allows us to use MEC and MNPB as the textbook does, just with a different interpretation.  Different forms which MEC can take.


September 8:  Socially optimal levels of output for various types of MNPB and MEC curves. Brief additional remarks on why the intersection of MNPB and MEC is the social optimum. The Theory of the Second Best; illustrations using NAFTA and a polluting monopolist. Pareto improvements and Pareto Optimality, also known as Pareto Efficiency.


September 13: The "Potential Pareto" Criterion.  Chapter 5: George Stigler's "Coase Theorem" (named after Ronald Coase), its weaknesses, and its failure in the presence of income effects (that is, its failure in the real world). Failure of Coase-Theorem-related idea that "economists can recommend the efficient level of pollution and, separately, politicians can pick whatever level of income distribution they like (using lump sum taxes)." (The idea fails because efficiency and distribution are linked.)   Chapter 6: Pigouvian taxes, linear and nonlinear.


September 15:  Pigouvian subsidies, linear and nonlinear.  Abatement: abatement (total) costs; marginal abatement costs.  Optimal level of abatement.  Optimal levels of abatement and output.


September 20:  Continuation of solving for the jointly optimal levels of abatement and of output.  Taxes on non-abatement.  Beginning of discussion of taxes versus standards.


September 22:  Superiority of pollution taxes over pollution standards.  Chapter 7: Violation of a standard is usually a fine, which functions in some ways similarly to a tax.  Loss of social surplus if the government uses the wrong MNPB curve and uses either a pollution tax, or a pollution standard.


September 27:  Loss of social surplus if the government uses the wrong MEC curve.  Dynamic efficiency (research and development of pollution-reducing technology).  Administrative efficiency (taxes vs. standards); New Source Review.  Chapter 8: Introduction to Cap and Trade.  Grandfathering & auctions.  Demand and supply curves of pollution permits.


September 29: Potential problems with permits: imperfect competition creating a barrier to entry; hot spots.  Regulating emissions versus regulating ambient air quality.  Permit trading in practice, including the Kyoto Protocol.  Permits versus standards.


October 4: Pollution permits, continued.  Chapter 9: Monetary valuation, including of human life.  Some examples of the monetary value of pollution costs and monetary value of pollution control benefits (Tables 9.1, 9.2, and 9.3).  Diagrams of WATP and WTA; their connection to compensating variation and equivalent variation.


October 6:  Potential problems with Cost-Benefit Analysis arising from the difference between WATP and WTA (equivalently, between EV and CV). Different types of value: use value, existence value, option value, bequest value, and quasi-option value.  Chapter 10: Expressed preference methods; revealed preference methods.  Hedonic pricing.  The Travel Cost Method and its difficulties (inconvience or love of travel; nearby sites; substitute sites; relocation).  Introduction to Contingent Valuation.


October 18: Problems with Contingent Valuation: strategic bias and design biases. Overall extent of agreement between contingent valuation and revealed preference methods.  Chapter 11:  History of environmental regulation in the USA.  Zoning regulations ruled legal.


October 20:  Overview of US federal pollution laws and methods of regulation.  Environmental regulation in the United Kingdom and historical conflict between the U.K. and continental Europe.  European interpretations of the Polluter Pays Principle.  Chapter 12 (not on the exams): extremely brief overview of pollution problems in the USSR and other Communist countries.  Chapter 13: Acid rain.  The "hole" in the upper atmosphere's ozone layer caused by chlorofluorocarbons (CFC's), and the uses of CFC's.  (The gas used for library fire suppression was "halon.")


October 25: Continuation of the "hole" in the ozone layer; the Montreal Protocol.  Climate change: physical and chemical explanation of the scientific mechanism; history of climate science; carbon sinks; tipping points (permafrost); long residence time of carbon dioxide in the atmosphere, and long lag times of land and especially ocean warming ("The World Without Us" book); sea level rise; change in ocean pH; change in ocean salinity (possible related tipping point: the Gulf Stream current in the North Atlantic ocean); storminess, drought, reduced snowfall; expansion of range of agricultural pests and tropical diseases.


October 27:  Long residence times for carbon dioxide; long lag times for oceans to warm or cool.  Methane.  Stocks vs. flows of greenhouse gas emissions.  Chapter 14: Discounting.  Mathematical formula for the present value of an "I owe you" ("IOU").  The Social Rate of Discount: positive? zero? negative?  "Cake-eating" problems.  Intergenerational altruism.


November 1:  Overlapping generations vs. sexual reproduction.  Higher discount rates are often (but not always) bad for the environment.  Sustainability (but also see Section 3.3, later in the course). The discount rates used by William Nordhaus compared with Nicholas Stern.  Chapter 15: Environmental Ethics.  Individual values versus Public Preference Values.  The Moral Reference Class.  Discussion of Figure 15.2: consequentialist (teleological) positions vs. non-consequentialist (deontological) positions. 


November 3:  Continued discussion of Figure 15.2.  Historical, scientific, or non-scientific meanings of Gaia.  Theories of Justice: Utilitarian, Libertarian, and Contractarian.  Difficulties in thinking about intergenerational equity.  Also, answering a Chapter 4 question about how Equivalent Variation and Compensating Variation are related to Willingness to Accept and to Willingness and Ability to Pay in an indifference curve map.


November 10: Chapter 16:  Introductory biological population dynamics.  Logistic growth; critical depensation.  The F(x) function; the growth rate, the proportional growth rate, and the "intrinsic growth rate."


November 15: Fisheries handout, introductory portion (before Section 1).


November 17: Fisheries handout, Section 1 and part of Section 2 (just before imposition of steady state onto solution of maximization problem).


November 22: (The substantive part of this video begins at 4:30.) Remainder of the fisheries handout (main result and interpretation of the optimal private-property fishery; schooling and search fisheries; "socially optimal" extinction). Chapter 17: "The Tragedy of the Commons" by Garrett Hardin. Various species in danger of extinction.


November 24:  Methods of fisheries regulation: mesh sizes; season length regulation (examples: Alaskan halibut; Great Salt Lake brine shrimp eggs); Individual Transferable Quotas; Marine Protected Areas.  History of fisheries: cod off the Atlantic coast of Canada; Iceland vs. U.K. "Cod War" (actually, three of them, in 1958-1961, 1972-1973, and 1975-1976; Ecuador in the 1960's and the 12-mile vs. 200-mile fisheries regulation limit; Canada vs. E.U. "Turbot War" of 1994-1996; decreasing tuna population in the North Atlantic due to E.U. overfishing; foreign overfishing and the rise of Somali piracy (2005 to 2012); dispute between France and the UK over post-Brexit fishing rights in the waters between those countries.


In the video, I made a mistake describing the Turbot War.  It happened a couple of years after the collapse of the cod fishery off the coast of Canada, but it was not about cod, it was about turbot, a fish the Canadian government hoped could partially replace cod as a source of fishing income.   Like cod, turbot lived both within Canada's Exclusive Economic Zone and in international waters.


Chapter 18: Why "short-run profit maximization" will not constitute a dynamic perfectly competitive equilibrium.  Adapting the "dynamic perfectly competitive equilibrium for the private-property fishery" to the case of exhaustible resources: the Hotelling Rule.


November 29:  "Profit vs. time" for Hotelling Rule behavior and for "maximization of short-run profit" behavior, and the implications of this for the plausibility of Hotelling Rule behavior.  (Aside: why firms should maximize the present discounted value of profit (or "net present value" of profit)---because it is equivalent to maximizing future value, which is what firms should care about---versus inferior alternatives which some firms actually maximize, including short-run profit, or "internal rate of return," or "returns divided by assets.")  Figure 18.4: comparing a low versus high discount rate for a Hotelling Rule-following industry.  Chapter 19: Malthusian, "Ricardian," and Cornucopian schools of thought concerning future resource scarcity.  The books Limits to Growth and The Population Bomb.  Figure 19.1: the McKelvey Box.


December 1:  (An aside on how the present value formula is derived (using a "no regrets" criterion) and why it is important.)  The Exponential Exhaustion Indexes of Limits to Growth.  Various historical predictions about resource exhaustion.  Recycling, durability, and the "right to repair."  Material substitution.  Chapter 22: An overview of environmental problems and resource scarcity in developing countries.  Lack of access to safe drinking water.  Figure 22.1, the beginning of an extensive discussion on the very many effects of reduced tree cover (deforestation).


December 6: Continued discussion of Figure 22.1.  Historically successful common property regimes in traditional societies; under pressure from market capitalism, they can evolve into open access or private property.  Chapter 1: Students should read this chapter in full.  Highlights: Physiocrats ("Labor is the father and Nature is the mother of wealth").  Adam Smith and other Classical economists.  Karl Marx's theory of history and attitude towards Nature and Technical "Progress."  John Stuart Mill and the Stationary State.  Humanistic/Institutionalist economists: Thorstein Veblen; endogenous tastes; utility based on relative social standing rather than absolute consumption.  Conservation movement in the early 20th century.  Rachel Carson's Silent Spring and the rise of environmentalism of the 1960's.  Easterlin's work on the complicated relationship between money and happiness (Hirsch, Veblen, Keynes, on utility based on relative position).  "Utopian socialism" and early 19th century religious communal movements.  "Social Darwinism"; triumph of capitalism over other economic forms implying capitalism's superiority; but the success of the human species may be more due to humans' empathy for each other and ability to cooperate, rather than to compete.  Darwin himself felt that "humanity’s success hinges on its level of compassion or sympathy" according to the 2017 article "Survival of the Fittest Has Evolved: Try Survival of the Kindest" on NBC's web site.


December 8: Chapter 2: Herman Daly, Steady-State Economics; Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process; "Ecological Economics."   The circular flow diagram and its shortcomings.  Kenneth Boulding, "cowboy economy" versus "Spaceship Earth."  First Law of Thermodynamics (conservation of energy; conservation of matter).  Definition of the change in entropy.  Second Law of Thermodynamics: in an isolated system, entropy cannot fall.  Experimental measurements of entropy changes.  The Second Law and Time's Arrow.  The Entropy Law (i.e., the Second Law of Thermodynamics) and an ice cube melting on a hot sidewalk.  Maximum efficiency of heat engines (but not of, say, electrical motors).  Perpetual motion machines ruled out.  Ludwig Boltzmann's Statistical Mechanics: combinatorics, but confused with probability and randomness, like mixing salt and pepper.  Note that for a mixture of oil and water, the entropy-increasing direction is towards separation (towards "order", not towards mixing (not towards "disorder").  Entropy should not be interpreted as increasing "disorder" in the intuitive sense of that word, but that interpretation is seen often, including in Georgescu-Roegen's work.  This may come from improper understanding of the entropy change when two gasses mix.  "Heat Death."  Chapter 3: Sustainability and Hartwick's Rule.  Substitutibility between natural capital and man-made capital.  Questions around aggregating different kinds of capital.  Optimal population size (and John Stuart Mill); Kenneth Boulding's transferable birth licenses.  Herman Daly's Ends-Means Spectrum: the ultimate means and the Ultimate End.