Econs 430 Study Guide - Final Exam

Topics: Market failure, Welfare economics, Externality Pages: 9 (3157 words) Published: February 24, 2013
Climate Change: Greenhouse gasses in atmosphere. Solar energy is absorbed, reflected (infrared radiation) but GHG trap heat. Issue: Man made greenhouse gasses affecting temperature. Why exists: CO2 acts as a negative externality. There is a commons issue with the atmosphere (inadequate property rights). Supply & demand: Supply increases – searching for new pools of resources and new tech makes it easier and cheaper to extract. Impacts: Benefits: Heating costs less, agricultural production patterns change. Harms: Sea levels increasing (flooding), cooling costs increase (china/india), increase in insects (affects agriculture/humans spread of disease), health (insects, hot – heat stroke), agriculture production, storms (warmer weather = more severe storms), decrease in biodiversity (polar bear trying to get on ice). Solution: 1997 Kyoto Protocol Special Interests: Special interest groups have extreme positions because they engage rationally ignorant, ask for more in order to get where they want (negotiations), and debating other group. Economic Theory of Regulation: Which regulation gets picked – how we end up with the regulation we do. A policy maker will set the regulation. He will get favors (in the form of support/$$$/things that get them re-elected). He decides which policy to enact by choosing the largest bundle of favors, and that party gets their regulation elected. Special interest groups offer support, $$$, votes. Bootleggers and Baptists: Baptists – make it illegal to sell alcohol on Sundays. Bootleggers – love it because they have monopoly on Sundays. Together they form coalition – Baptists provide morale justification for policy, bootleggers can provide money. Related to global warming because: In favor of Kyoto: Baptists – moral – greenpeace (environmentalists), biofuels (supports agriculture jobs). Bootleggers – profit – alternative energy companies. Against Kyoto: Baptists – moral – unions (coal miners – jobs), Bootleggers – profit – oil companies, fossil fuels, coal. Petroleum: 1 barrel = 42 gallons. 19gal-gasoline, 9gal-diesel, 4gal-jet fuel, 4gal-heating oil, 2gal-liquified gas, 7 others – soap, tires, crayons etc. Supply Characteristics: 90,000,000 barrels/day. Reserves=proven deposits that are economically feasible to obtain. Regions of world producing 1)Middle east 2)North America. Demand Characteristics: Consumption is increasing over time because population, preferences, and income. US has largest consumption per capita by far. 2/3 US consumption is transportation. Rest of world, 2/3 consumption for heating and power. Price History: 10 years ago - $25-$30/barrel. Now - $100/barrel. Market Structure Importance: Collusion (to act together) OPEC=Organization of the Petroleum Exporting Countries – Controls 55% traded petroleum, not illegal for collusion to happen between OPEC countries. They set production quotas – allotment of production for each country, Saudi Arabia will flood market to deal with cheaters. Restriction production makes prices go up, but also R&D teams begin researching alternatives so they don’t make prices too high. OPEC wants high prices to increase profit, but not so high as to induce innovation. Alternatives: Oil Sands, Bio Fuels, Hydrogen Fuel Cells Tar Sands: Over 20 countries, but a large one in Alberta, Canada – Athabasca: 170 billion barrels in reserves – 95% canadas oil reserves. 1.7 trillion barrels exist, but not economically feasible. How Used: Petroleum product creation. Get by strip mining for extraction. 150-200 feet deep. 2 tons of sand = 1 barrel. Peat, logs, and forest cover the sands. As prices go up, it makes it more “worth it” to extract. Controversies: Extraction of oil causes environmental damage (stripping peat, logs and forest). Conflict exists because of profit. Environment vs. development. PR + Externalities – disconnect between what creates the benefit and what generates the cost. Govt and oil companies own the land. Oil sands extracted, but forests...
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