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ECON 3220 (3)
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Chapter 3

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University of Lethbridge
ECON 3220
Ali Kamar

Chapter 3 Analytical tools: Demand-Supply Model  Basic analytical tool in environmental economics starts with standard competitive market model o It helps us understand what happens when competitive market fails to account for pollution externality and how government actions can help o It also helps us quantify the benefits and costs with and without such government actions/policies  Competitive market model uses market or aggregate demand curve and market or aggregate supply curve Demand curve  The demand curve is a relationship between quantity demanded and market price  The price reflects what an individual is willing to pay (WTP) for consuming each unit of the good  Usually, individuals are willing to pay high price for the first few units but lower price for additional units- marginal WTP falls  Because with limited budget, opportunity cost of more units increases. So, individuals are not willing to pay as much for additional units as for the first unit.  This falling mWTP give the downward sloping demand curve. So, the demand curve is also known as the marginal willingness to pay (mWTP) curve  It is also known as the marginal benefit (MB) curve as each point on the demand curve reflects the monetary value of benefits of consumption from additional units Drawing a demand curve  Always written as function of Q. Drawn as function of P.  Example: o Demand curve Q=10-2p. inverse is P=5-0.5Q o Find y int by setting Q=0. P=5 o Find x int by setting P=0. Q=10. Aggregate demand curve  Aggregate demand curve is derived as the horizontal summation of two or more individuals’ demand curves at each price  Aggregate demand curve is also drawn in inverse  Kink occurs if vertical intercepts are different Consumer surplus  Individuals derive benefits from consumption  The dollar value of the benefits of consumption is the difference between what individuals are willing to pay (tWTP) and what hey actually pay (TE)  This is also known as consumer surplus (CS) the excess beenfits received fr
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