Main, Robert S.; and Orris, J. B., "A simulation approach to the choice between fixed and adjustable rate mortgages" (1996). Scholarship and Professional Work -Business. 8.
Many economics texts introduce their analysis of negative externalities by examining a tax on the output of polluting firms, sometimes called a "simple Pigovian tax," often pointing out that taxing pollution directly is superior to taxing output and proceeding to discuss an emission tee as an alternative. They do not show how and why an emission fee is more efficient than an output tax. This note presents a numerical example allowing comparison of the welfare effects of the two approaches, as well as showing why simply reducing the pollution intensity of polluters' output would be inferior to an emission fee.
Sharefkin et al. [1984] have presented a sophisticated groundwater modeling apparatus for evaluating the damages from groundwater contamination. The groundwater modeling portion of the paper generates a predicted exposure matrix, showing the amounts of each chemical which their model estimates will be contained in water drawn from each well each month for 20 years following a spill. Together with assumptions about the population at risk, the dose-response relationship, and the value of a "statistical" life, this information allows them to estimate dollar damages of a specific spill scenario. This dollar amount is then used to calculate the maximum amount a decision maker would be willing to pay to ensure that a spill does not occur. The present comment shows that their calculation is based on implausible assumptions and suggests a more reasonable set of assumptions within an explicit decision-theoretic framework.The section in question is found on page 1779:However, there is another perspective on, and interpretation of, the calculation just performed. Suppose that we are contemplating siting a disposal facility in a location that is, topographically and geohydrologically, identical with the Price site. Suppose further that we are contemplating the installation, at that new facility, of some physical barrier to the kind of release that contaminated the Upper Cohansey aquifer. Say that we have an estimate of what that physical barrier will cost; how can we tell if incurring that cost makes sense?A simple calculation can be done, requiring only a simple multiplicative modification by some estimate of the probability of the initial release. This is required because we are now pondering costs and benefits before siting, and thus before any possible contamination problem.The passage quoted states that the benefit from installing a barrier that would prevent a spill at the site is equal to the probability of a spill in the absence of the barrier (X) times the damage that would result if the spill took place and was undiscovered until 20 years of human exposure had occurred (CC). This would be correct only if the probability of discovery before 20 years of exposure were zero or if the damages that would be incurred in the case of early detection were as high as if exposure occurred for 20 years. Neither of these conditions is plausible. It is at least possible (actually, it is very likely) that a spill of the type they describe would be discovered before 20 years of human exposure had occurred. Also, it is plausible that a spill discovered quickly will be less expensive to clean up than one allowed to spread for many years. If there is a positive probability of discovery before 20 years of exposure and if the damage resulting from the spill (including any human exposure plus remedial costs) would be less if the spill were discovered earlier, the benefit of providing a completely effective barrier would be smaller than X. CC. These points can be seen more easily if we construct a decision tree or simplified lottery to ...
It is often argued that the declining support of free institutions which we have observed in our recent history is, in part, a result of economic illiteracy. That is, ignorance and misinformation about the workings of a voluntary exchange system and about the deleterious effects of governmental interference in that system lead to support of increased government intervention in the economy. The particular version with which this paper deals argues that we get many of our views about the economy from our social studies classes and, specifically, from our textbooks. Those views, in turn, influence the way we vote on the issues which relate to the economy. If this view of the process is correct, then it is important to examine how effectively the voluntary exchange system and the effects of government intervention are being treated in these texts. If most texts are doing a good job in these areas, then one must look elsewhere for an explanation for the declining support for free instructions. If, on the other hand, social studies texts are in general doing a poor job in conveying an accurate understanding of the workings of voluntary exchange systems and government intervention in them, then this suggests that some improvements can be made by changing the way in which such texts are written. This paper is a condensed version of a report on the findings of four separate studies which were prepared under a grant from the Foundation for Research in Economics and Education. They critically analyze the economic content of leading high school texts in World History, U.S. History, Sociology, and Government. The Worid History study was performed by C. W. Baird; the U.S. History study was performed by L. F. Saft, with assistance from Baird; the Sociology study was done by G. J. Santoni, with assistance from J. W. Ashley; and the Government study was performed by C. C. Stone.1 Each report assesses the economic issues discussed in the books, presents the correct economic analysis of each issue, and compares this analysis with that found in the books. This brief summary is intended to touch on some of the highlights of the longer reports and to point out some of the key areas in which important errors of economic analysis occur. Each of the four reports documents different errors. Some errors are of a technical nature. Others reflect a more profound misunderstanding of the way in which markets operate. Because of space limitations, this paper will deal largely with the latter. In addition, limitations on space prevent us from reporducing the quotations found in the longer version of this paper and in the reports. Labor Markets The most numerous and serious errors occurred in the discussions of labor markets. Most of the texts (15 out of 17) have some discussion which reveals their authors' views of how labor markets work. Of those 15, all but one make serious errors of fact or analysis regarding the workings of labor markets and of interventions in them. The most common mistakes were in the area of historical facts. All four U.S...
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