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AGEC/FNR 406 LECTURE 14

AGEC/FNR 406 LECTURE 14. Pesticide Runoff Potential from Field Crops. Correcting market failures. Static efficiency is obtained when net benefits for a single period’s are maximized.

sydney-fleming
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AGEC/FNR 406 LECTURE 14

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  1. AGEC/FNR 406 LECTURE 14 Pesticide Runoff Potential from Field Crops

  2. Correcting market failures Static efficiency is obtained when net benefits for a single period’s are maximized. If private efficiency does not equal social efficiency, then we have market failure. Intervention may be justified, and many approaches are available. What is the “best” way to correct the market failure?

  3. Damages MD D Total Damage E Q of Emission Marginal damage function Dollar measure of incremental damage from pollution

  4. Important cases 1. private benefits = social benefits private costs = social costs (no market failure) 2. private benefits = social benefits private costs NE social costs (positive or negative externality) 3. private benefits NE social benefits private costs = social costs (positive or negative externality)

  5. PMC=SMC P* PMB=SMB Q* Q Case 1 private benefits = social benefitsprivate costs = social costs

  6. PMC P* P PMB=SMB Q* Q Q Case 2 private benefits = social benefits private costs NE social costs SMC = PMC + MD MD

  7. PMC=SMC P P* PMB Loss inBenefit SMB Q* Q Q Case 3 private benefits NE social benefits private costs = social costs

  8. Possible interventions 1. Moral suasion 2. Government provision of goods 3. Damage prevention 4. Command and control 5. Economic Incentives

  9. Deriving values for non-market goods Two conceptual approaches to valuation 1. Revealed preference 2. Stated preference

  10. Revealed preference approaches Hedonic pricingprice attributed to characteristics of a good Hedonic wagesaccepted wages reflect tradeoffs such as risk and living conditions Travel costthe value of a recreation site reflects the cost people willingly pay to get to it

  11. Stated preference approach Contingent valuationuse a survey to measure willingness to pay regarding actual or hypothetical changes in the environment

  12. Example 1: Hedonic wage Construction work is risky, and the riskiest jobs have wage premia. What if workers are willing to accept a 1/1000 annual risk of death to take a job that pays $1200 more per year? What is the value of one “statistical life”?

  13. Calculating the hedonic wage Workers are willing to accept a 1/1000 annual risk of death to take a job that pays $1200 more per year. $1,200 * 1000 = $1,200,0001000 people have a collective willingness to accept $1.2 million to be exposed to the death of one individual.

  14. Example 2: Travel cost model 5 people 1 recreation site{A,B,C,D,E} B A D C E

  15. Visitation data Individual Cost # visits A 0 50 B 25 45 C 50 40 D 125 25 E 250 0

  16. Construct a demand curve Individual Cost # visits • E 250 E 250 0 D 125 25 C 50 40 B 25 45 A 0 50 TravelCost • D P = 250 -5Q • C B • A • 0 0 50 Number of visits

  17. 250 • E P = 250 -5Q • TravelCost D • C 0 • B • A 0 25 50 Number of visits Demand curve can be used to find: 1. consumer surplus (TB) 2. impact of increased fees

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