Question

1. Define each of the following terms and concepts and explain their significance in the economics of natural resources. In your discussion of each term/concept, give relevant examples.

1. [3 marks] Total willingness to pay
2. [3 marks] Net present value
3. [3 marks] Social costs
4. [3 marks] Efficiency
5. [3 marks] Private good
6. [3 marks] Market failure
7. [3 marks] Discounting

Answer 1

A-

Total willingness to pay indicates purchasing power of a consumer i.e how much consumer is able to pay for goods and services. In economics the major difference between want and demand is willingness to pay. For example if A belongs to middle class familiy and he desires to have jaguar car, it is his want because he wish to have it but does not have money to purchase it. On the other hand if a well established business man wants to have new model of jaguar it is his demand because he has willingness to pay for that car. Therefore willingness to pay means power of the customer to pay for goods and services.people with higher income have high willingness to pay.

B-

Present value is calculated when future money is given. Present value of future money can be defined as the amount of money which is equivalent to the money if received today. The value of todays ₹100 will not be not be same in the future because value of money depriciates with time. So if you are going to receive ₹100 after 5 years its value will not be as much as it is today. That is why interest rates are imposed on the money if it will be received in future. For example- if A knows that he is going to receive ₹1000 in future say after 10 years , he needs to calculate this future value in terms of todays value. Present value can be calculated by

Present value= future value/ (1 + rate)ⁿ

Where rate means rate at which money will be discounted, n means number of years, in above example n is 10 years.

C-

Social cost is the cost that is borne by external environment due to some activities. The concept of social cost is basically used in business where firms produce goods and services by investing a lot of capital which is internal cost and in addition there are some external cost which are incurred. For example in case of production of goods various natural resources like water, non renewable resources etc. Are taken from the environment moreover there is water pollution, noise pollution, air pollution. These are the cost that society has to borne and for which firms do not pay.

D-

Efficiency refers to doing any productivity activity with minimum cost and with proper utilization to available resources. For example a student is studying a chapter for his exams and normal time required for that chapter is 2 hours but that students clears all his concept in 1.5 hour and finishes it. It means he is efficient. He took minimum time to complete that chapter.

Similarly in economics a labour is said to be efficient if he is producing maximum amount of units with minimum resources.

E-

Private goods are the goods which are owned by the individual or group or organization for personal use and purpose and use of these goods is restricted to those who pay for it. It means everyone can not use or take benefits from those goods.

For example if a person purchases a chair for his own comfort and uses it. Only he or his familiy members can use it because he has paid for it. On the other hand chairs and benches in the park are public goods and anyone who visits the park can sut on them.

F-

Market failure refers to the inability of the firms or government to meet the demand in the economy and consequently facing losses. When demand in the economy is more than the supply it leads to market failure and brings economic growth and gdp down. It means goods and services in the economy are not sufficient and inefficient to meet the demands. Market faliure occures when large amount of money is invested and returns are less than expected.

G-

Discounting is the technique which is used to calculate the present value of money when future value of money is given.

In general discount means reduction in the amount. When shopkeepers offer discount it means he will sell at a lower rate. Similarly in economics discounting is a technique which tells the present value of money by decreasing the future value of money by certain percentage. If we want to know the present value of future sum we have to discount the future value for present value.