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eco2118 January 11.docx

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University of Ottawa

January 11 2013I COST OF A LITRE OF GASOLINEKey Question What is the cost of ones decision to drive What is the cost of a litre ofgasoline1 Factors to consider Underlying commodity petroleum Taxesgas income Pollution externalities Sprawl and congestion Accidents riskinsurance costsi Crash incompatibility Anderson and Auffhammer 2012 externalcost equals 027litreActual calculation of the total costs is very complexKey point some of the costs of ones decision to drive are borne by the individualmaking the decision to drive others are borne by others ie they are external to theindividual decisionmaker2A more recent study estimated the social cost of a gallon of gasoline at 460 low to1414 high per gallon This implies the price should be between 5601514gallonII ECONOMIC APPROACH GENERALEconomics is the study ofi the allocation of scarce resourcesii decisionmaking by individuals firms governments and otherorganizations such as families NGOs etcthe role of constraints on decisionmaking are particularlyimportantiii role of information and policy in decisionmaking and resource allocationiv how incentives influence behaviourEconomic theories apply to any decisionmaking scenario not just those involvingtangible market commodities Similarly economics is not just about profits and moneyOverview of economic thinkingKey concepts scarcity opportunity costs tradeoffs marginal benefits marginal costsefficiency and equity1 Economists tend to group ideas and research into several discrete categories Theories Models Empirics Policy and application Positive v normative economics Positive economics is the study of how people actually behave An example of a research question within positive economics is how doindividuals react when a 5 cent charge is levied on plastic bags at grocerystores Normative economics is the study of whether or not given markets and decisions
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