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EC238 Study Guide - Final Guide: Ource, Paperboard, Fuel Tax

Course Code
Roger Buehler
Study Guide

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EC238 Final Review 2015-12-08
Chapter 1: Economics and the Environment
Circular Flow Model: basis of the relationship between economic activity and the
environment (does not show explicit linkage)
Materials Balance Model: Circular Flow within larger schematics to show links
between economic activity and nature
First Law of Thermodynamics
-Matter and energy can neither by created nor destroyed
Second Law
-Nature’s capacity to convert matter and energy is not without bound
Natural Pollutants arise from non-artificial processes in nature (ocean spray)
Anthropogenic Pollutants are human induced and include residuals associated
with consumption and production
Stationary Source: fixed
Mobile Source: any non stationary source
Point Source: single identifiable source
Nonpoint: a source that cannot be identifies

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Allocative Efficiency: requires resources to be appropriated such that additional
benefits equal additional costs
Cost-effectiveness: requires that the least amount of resources be used to
achieve an objective
Command and Control Approach: regulates polluters through the use of rules
Market Approach: Incentive-based policy that encourages conservation or
pollution reduction (polluter-pays principal)
Chapter 2: Modeling the Market Process (Review of Basics)
Private Good: Rivalry in consumption and excludability
Market Demand: The decisions of all consumers willing and able to purchase a
good (Private goods = vertical summing individual demands)
Market Supply: captures the combined decisions of all producers in an industry
(Horizontally summing the individual supply functions)
Profit is Maximized @ MR=MC or TP=0
Competitive Market:
Chapter 3: Modeling Market Failure
Public Goods Approach
A Public Good is a commodity that is non-rival in consumption and yields non-
excludable benefits
Public Good Demand: difficult to find due to lack of revealing Willingness to Pay
Public Good Market Demand: undefined therefore Allocative efficiency cannot be
achieved without a third-party intervention

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Government Intervention
-Direct provision of public goods
-Political procedures and voting rules to identify preferences
Externality Approach
Externality is a spill over effect from production or consumption
-If the externality affects a broad group and is non-rival and non-excludable it is a
public good
-If it affects a narrower group, it is just an externality
Marginal Social Cost = Marginal Private Cost + Marginal External Cost
Marginal Social Benefit= Marginal Private Benefit + Marginal External Benefit
Set MSC=MSB (assume MEB is 0)
Property Rights
-Valid claims to a good or resource that permit the use and transfer of ownership
through sale
-Economics says it’s the absence of rights that matters not who possesses them
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