Andy Solow's lecture notes

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September 6, 2005

class (or whatever this is):  meet on alternate Tuesdays 4:30 to ~6; start with 3 organizing sessions (me, Scott, Larry); student-organized around topics:  how should you think about it?  what is actually happening?  role for scientists?

talk about analytical approach, based on economics; not an economist, but been around them a lot


     micro-:  (rational) behavior of
                   individuals, firms

     macro-:  behavior of economies

analogue in ecology:  individual behavior, ecosystem behavior (micro basis of macro)

our problems micro (but ...)

traditional modern micro focuses on productive activities; Adam Smith’s invisible hand; under assumptions, markets deliver efficient allocation of resources (efficient = Pareto efficient; free lunches eliminated); theoretical result and empirical fact (not just religious view)

efficiency, equity; positive, normative

economists choose to focus on positive side

e.g., Hotelling, optimal extinction

Jonathan Swift, A Modest Proposal
Garrett Hardin wasn’t kidding

assumptions underlying market efficiency include:

     atomistic (no monopoly, oligopoly)

     private goods, rival consumption;
     for public goods, private firms can’t
     capture profits, under-invest; government
     provides, subsidizes; patents (turn public
     good temporarily into private good)

     no externalities

externality is cost (or benefit) not included in producer’s calculus; classic example is pollution

positive statement:  government intervention - i.e., policy - justified in face of market failure


     Coase Theorem; under assumptions (no
     transactions costs), efficiency is gained
     whether rights are vested in polluter or

     efficiency of market means that
     economists tend to favor market-based
     solutions to market failures (trading
     schemes) over command-and-control

     free trade, “globalization”, gains from
     trade (all participants gain),
     overwhelming empirical evidence;
     transitional and distributional effects,
     differential “non-economic” costs
     (regulations, labor unions, etc.)

     sustainability, fungability, trade-off;
     economists want to sustain benefits,
     not things

     discounting (tricky), intergenerational

economic framework (not recipe) for environmental (and other) policy decisionmaking based on cost-benefit analysis

basic principle:  adopt the policy with maximal net benefit (total benefit minus cost); net benefits affected by policy instrument (i.e., economic, not environmental, endpoints) - fisheries

when there is uncertainty, adopt policy with maximal expected net benefit; requires a Bayesian framework in which (all) uncertainty expressed in probabilistic terms; risk aversion (diminishing marginal utility of money)

include all costs (and benefits)

role of scientist?

recent actual example:  USCG developing standards for ballast water management to control introductions of non-indigenous species; real hard problem because cost of introductions very uncertain; standards written in terms of density of organisms allowed; basic (implicit) idea:  reduce initial population size to reduce probability of establishment; scientist:  density must be 0 to ensure no introductions; ignores cost; “right” thing to do is tighten standard to the point where marginal benefit = marginal cost; like I said, tough problem


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Last updated September 15, 2005
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