Answer To Q6
Answer To Q6
Answer To Q6
Environmental economists value the environment in monetary terms through the technique
of cost-benefit analysis. The key concept in defining value according to environmental
economics is the willingness-to- pay (WTP) principle which is reflected through supply and
demand curves in a market interaction.
In a basic economic analysis of markets, supply and demand curves represent costs and
benefits. A supply curve tells us the private marginal costs of production—in other words,
the costs of producing one more unit of a good or service. Meanwhile, a demand curve can
be considered a private marginal benefits curve because it tells us the perceived benefits
consumers obtain from consuming one additional unit. The intersection of demand and
supply curves gives the market equilibrium. We can add the externality costs to the
production costs to obtain the total social costs of automobiles. This results in a new cost
curve which we call a social marginal cost curve. The social marginal cost curve is above the
original market supply curve because it now includes the externality costs. Note that the
vertical distance between the two cost curves is our estimate of the externality costs of
automobiles, measured in dollars.