ENR 201Ec 1661 Section 3504.pptVIP

Section 3/6/2009 VSL Static vs. Dynamic Efficiency (Example: optimal extraction of a non-renewable resource) Defining/ measuring scarcity Definitions of sustainability These concepts are all important for the part of the course we are now covering: natural resource economics VSL How to value reductions in risk of mortality? Empirical Methods include those we have already seen- hedonic wage studies, averted behavior studies, and contingent valuation VSL is also a concept used VSL is people’s stated or revealed marginal valuation for a small change in risk, standardized (extrapolated) for a risk change of 1.0 (one life). VSL Continued VSL= MWTP or MWTA/ small risk change MWTP or MWTA estimated from hedonic wage or contingent valuation Important remember: this is not a value of a life Not in ethical terms Not in technical terms Not in economic terms (due to non-linearity) Government uses VSL estimates in decision making Remember: calculations on per life saved basis, ignore scale of policies Static vs. Dynamic Efficiency Review: static efficiency? maximizing welfare (net benefits) at a point in time Assumes that time is not a crucial part of the decision (what you do now does not affect future) i.e. one period model O.k. for pollutant that dissipates rapidly or reproducible capital, etc. Another way to see the same thing. . . BUT Today’s use of a non-renewable resource affects our ability to use it tomorrow So we must consider dynamics Dynamic efficiency: Maximizing total welfare over a set of time periods Equivalent to maximizing the sum of the net present values of all benefits We need to use it when time imposes significant constraints on a problem E.g. in our example, we have two periods and total availability of resource is less than 30 units Choosing the dynamically efficient allocation of a non-renewable resource Understanding the tradeoff: Choosing dynamically efficient allocation, cont. First, we must convert value of benefits from different time periods