1.What is cost-benefit analysis?

Cost benefit analysis is a systematic process that businesses use to analyse which decisions to
mate and which to forgo.

To find cost of benefit use Net Present Value

Step:
1. Find pv factor - 1/(1+r)^n ( from year 0)
2. Find pv of future benefit (from year 1) - Cash Flow x pv factor (for each year)
3. Total all the value of pv future benefit
4. Find net present value ~ present value of future benefit - present value of future cost
(use Cash flow year 0 x pv factor year 0)
2. What is a direct use value & Indirect use value
Direct use value refers to the economic value derived directly from a resource or ecosystem
service. For example, harvesting a tree and visiting a national park. Indirect use value is value
that involves benefit that are not directly consumed but contribute to overall well being, such
as biodiversity. These ecosystem benefits are not valued in the market. For example, water
purification which directly benefits humans by maintaining water quality and supporting
ecosystems.

3. How does one calculate the present value?

Fv(1/(1+r)^n

4. what are green house

gases.
- Carbon dioxide
- methane nitrous oxide.
- fluorinated gases
- water vapour
(natural component)

1. How do traditional environmental Economics and ecological economics define the value of
the environment differently?

Traditional environmental economics value the environment based on market prices and
employs cost-benefit analysis to assess environmental decisions. It often focuses on assigning
monetary value to ecosystem services. In contrast, ecological economics emphasises the
intrinsic value of the ecosystem , considering ecological functions and services beyond
market transaction. It recognizes that some aspects of the environment may not have a clear
market price and stresses the importance of preserving ecological integrity and resilience.

2. Why isn't the market efficient in the presence of externalities? How would you represent
this on graph:

Private cost & benefit Vs social cost & benefit

Market efficient isn't in the presence
externalities because it often fails to consider the full social costs of benefits of economic
activity. Externalities are the spillover effect on transactions that impact third parties who are
not directly involved. In the absence of mechanisms to account for these external impacts, the
market may lead to overconsumption, or underproduction of goods and services, as the price
does not reflect the complete societal cost or benefits. If market-determined prices
consistently induced people to fully account for the effects of their actions on others,
outcomes would be efficient. When prices do not capture these external effects, markets fail,
and public policy remedies may improve economic outcomes. The efficiency results in a
divergence between private costs and social costs, creating market failure. For positive
externalities (like education), the market may underproduce because the private benefit
doesn't account for the broader societal gains. A divergence between the marginal private cost
(MPC) and the marginal social cost (MSC) for negative externalities, or between the marginal
private benefit (MPB) and marginal social benefit (MSB) for positive externalities. Efficient
outcomes occur when MPC equals MSC or MPB equals MSB, but externalities disrupt this
balance, leading to a suboptimal allocation of resources.
The equilibrium price determined by the market may not reflect the true social costs or
benefits associated with a good or service. Externalities can lead to a divergence between
private and social considerations.
For negative externalities, the market equilibrium price might be lower than the socially
optimal price because it doesn't account for the external costs imposed on third parties. This
results in overconsumption and overproduction of goods causing environmental harm.

Conversely, with positive externalities, the market equilibrium price might be higher than the
socially optimal price, leading to underconsumption and underproduction. The market doesn't
fully recognize the broader societal benefits, such as education spillover effects, which can
result in suboptimal resource allocation.

3. what is meant by internalising

externalities

Internalising externalities involves incorporating the external cost or decision making

process. This can be achieved through regulations, taxes or market based mechanisms to
ensure that individuals or businesses take responsibility for their external impacts.

4. What is a pigovian tax?

Pigovian tax is a type of corrective tax aired at internalising externalities by aligning private
costs with social casts. This tax is imposed on activities that generate negative externalities,
such as pollution or congestion, to encourage individuals or businesses to consider and reduce
their environmental impact. Example: carbon tax, the government imposes a tax on the
carbon content of fossil fuels to recount for the negative externalities associated with carbon
emissions, such as climate change.