Upcoming in Class

1. Upcoming in Class Homework #6 Due Oct. 22 Quiz #3 Oct. 24 Extra Credit Writing Assignment due today by 5pm. Writing Assignment Due Oct. 24th

2. Cost/Benefit Analysis B>C – policy passes C>B – policy dies

3. Multi Value Projects create a variety of economic benefits Benefit by Value Driver (20 to 40 year present values, in 2011$ Million) $15,540- $49,204 $8,789- $16,407 $111-$396 $1,023-$5,093 $226-$794 $1,354-$2,503 $12,404- $40,949 $28-$87 $6,750- $32,797 Operating Reserves Transmission Line Losses Congestion and Fuel Savings Future Transmission Investment Wind Turbine Investment System Planning Reserve Margins Total Benefits Net Benefits Total Costs (Sum of Annual Revenue Requirements) 1 2 5 4 3 6 Increased Market Efficiency Deferred Generation Investment Other Capital Benefits

4. Chapter 6 – Discount Rate Accounts for the time value of money Rate at which a dollar value increases over time Present Value – The value of money in the future, put in terms of the value of money today.

5. Present Value of$1,000 at Different Discount Rates

6. Discounting & Environmental Policies The discount rate affects policies that have long term consequences. For example, consider the construction of a dam. 3 years to build – cost of $1 million each year 50 years of operation – generating $1 million each year, costing $100,00 to operate each year 50+ years of environmental damage - $500,000 each year

7. Discounting For the ith period PV [Bi] = Bi/(1+r)i For the sum across all period PV [B] = ∑i=1n Bi/(1+r)i

8. Costs and Benefits of a Dam Project

9. Discount Rate • If r is set low • Weights long term environmental damage heavier. • If the damages extend beyond the life of the project, then it is likely that the project will be canceled.

10. Discount Rate • If r is set high • The short run is favored. • Poor societies where struggle for today is impossible • Developed countries where the term of office for policymakers is short • Benefits from long-term environmentally favorable programs are much smaller.

11. Discount Rate and Policy • Neither a high or low discount rate is better for environmental valuation. • Low discount rates are often advocated on the needs of future interests • Global Climate Change • Soil Erosion

12. Discount Rates Utilized OMB = rate of return on government bonds (1.6 to 3.5) World Bank often uses 10 Sensitivity Analysis is an analytical tool that studies how the outputs of a model changes as the assumptions of the model changes.

13. Policy Analysis Cost/ Benefit Analysis Cost-Effectiveness Analysis Positional Analysis Impact Analysis

14. Future Outcomes Risk – the probability that an event will happen Uncertainty – different outcomes may occur Consider a person who smokes

15. Expected Values EV [X] = p[X] NB[X] p is the probability of event X occurring PVNB is the present value net benefits of event X

16. Expected Values • Risk aversion is the tendency to prefer certainty instead of risky outcomes, particularly in cases where actions may cause significant negative consequences • Precautionary principle is the view that policies should account for the uncertainty by taking steps to avoid damaging outcomes, especially when the outcomes are irreversible

17. Chapter 12 – Non-renewable Resources Physical supply - available reserves measured in physical terms without regard for cost and value Economics supply – the amount of a resource that is available based on current prices and technology

18. Classification of Nonrenewable Resource

19. Reserves Identified reserves – the identified quantity of a resources; includes both economic and subeconomic reserves Indicated or inferred – resources that have been identified but whose exact quantity is not known with certainty

20. Undiscovered Reserves Hypothetical – the quantity of a resource not identified with certainty but hypothesized to exist Speculative – the location and quantity of a resource has not been identified but is hypothesized to exist

21. Resource lifetime Subeconomic resources – resources whose costs of extraction are too high to make production worthwhile Economic reserves – resources of high enough quality to be profitably produced and are identified

22. FIGURE 5.3 The Efficient Market Allocation of a Depletable Resource: The Constant-Marginal-Cost Case. (a) Period 1 (b) Period 2

23. N-Period Case • With constant marginal extraction cost, total marginal cost (or the sum of marginal extraction costs and marginal user cost) will rise over time. • The graph shows total marginal cost and marginal extraction cost. • The vertical distance between the two equals the marginal user cost. The horizontal axis measure time. • Rising marginal user cost reflects increasing scarcity and the intertemporal opportunity cost of current consumption on future consumption.

24. Exhaustion of a Mineral Stock

25. Resource Extraction Choke price – the minimum price of a good or service that would result in a zero quantity demanded Price path – the price of a resource over time Extraction path – the extraction rate of a resource over time

26. Resource Rent for the Competitive Firm