Lecture C2 (2020-09-22): Aggregating Benefits and Costs Across Time

In this lecture, we review the basic shape of benefit and cost functions and how they relate to the analysis of marginal benefit and marginal cost. We then pivot to thinking about the effect of time and temporal discounting on benefits and costs. That allows us to move from utility functions (with their indifference curves) to social welfare functions. The budget constraint line from consumer choice theory is replaced by the production possibility frontier (PPF), and a new version of the equimarginal principle is introduced -- where the marginal rate of transformation (MRT) equals the marginal rate of substitution (MRS). This is all done graphically. In future lectures, we will give more concrete examples of solving for optimal resource allocation across time.