1
Q
What are the main functions of government for citizens?
A
Provide law and order, create a stable trading environment, provide universal healthcare & free education.
2
Q
What is a positive externality?
A
Benefit to someone who is not a buyer or seller, such as cultural solidarity and international policy.
ORRR A GARDEN
3
Q
What is the economic rational agent?
A
Selfishly maximizing my own anticipated utility.
4
Q
What is surplus in economics?
A
The difference between the utility of having the good and the utility of the transaction price.
5
Q
What is social welfare?
A
Maximizing the sum of everyone’s utility.
6
Q
What is a free market?
A
Transactions are voluntary, increasing social welfare.
7
Q
What is the problem with a rational agent in a free market?
A
A rational agent may fail to maximize social welfare due to market failures.
8
Q
What are institutions in economics?
A
Created to govern and redistribute wealth when free markets do not provide desired outcomes.
- Formal institutions: written, enforceable rules
- Informal institutions: unwritten norms, like tipping culture
9
Q
What is cost-benefit analysis?
A
The tradeoff between gaining additional social welfare and the cost of implementing policy.
10
Q
What is opportunity cost?
A
The utility an agent gets by doing the best alternative with their time.
11
Q
What is moral hazard?
A
When someone doesn’t bear all the consequences of their actions, leading to behavior changes. ex. insurance
12
Q
What is the marginalist principle?
A
Most activities are subject to diminishing marginal benefits (each additional unit of something gives you less extra benefit than the previous unit) and rising marginal costs (extra cost of producing one more unit goes up as output increases)
13
Q
What is the Peltzman effect?
A
Consumers adjust their behavior to a regulation in ways that counteract its intended effect.
- The safer they make cars, the more risks drivers will take
14
Q
What is the law of unintended consequences?
A
Policies often fail to help their intended beneficiaries due to perverse incentives.
- making it harder to evict tenants can lower the number of properties offered
15
Q
What is the cobra effect?
A
A situation where well-intentioned policies backfire, exemplified by a bounty on cobras in colonial India.
16
Q
What is Pareto efficiency?
A
A situation where no individual can be made better off without making someone else worse off.
17
Q
What is the first welfare theorem?
A
Under perfect competition, markets achieve Pareto efficiency.
18
Q
What is a Pareto improvement?
A
At least one person is better off, without making anyone else worse off
19
Q
What is deadweight loss (DWL)?
A
Deviation from Pareto efficiency where mutually beneficial transactions are not realized.
20
Q
What is Nash equilibrium?
A
Both players maximize their equilibrium option without considering the other player.
21
Q
What is the prisoner’s dilemma?
A
A situation where players follow their incentives rather than the welfare-maximizing solution.
22
Q
What are public goods?
A
Non-rival and non-excludable goods that are under-provided (a good or service is not being supplied in the quantity that is socially optimal, and is therefore typically supplied by the government) by the market.
- national defenese
- streetlights
gov steps in because public goods are non-excludable so firms have no incentive to provide them since they cannot charge users effectively.
23
Q
What is adverse selection?
A
Occurs when the seller cannot distinguish buyer types, leading to selecting bad types.
- Arises from asymmetric information
- Takes place before a contract has been made
one side knows something the other side doesn’t.
ex. heathcare or lemon car
24
Q
What is the relationship between fairness and inequality?
A
Fairness is subjective and often runs counter to individual interests; defining fairness is complex.
25
What is distributive fairness?
The final allocation of benefits across individuals is just or morally acceptable.
26
What are policies to address inequality?
Free medical care, unemployment insurance, disaster relief programs, and progressive taxation.
27
What is Joseph Stiglitz's view on inequality?
Inequality is perpetuated by rent seeking by the wealthy, affecting productivity and aggregate demand.
rent seeking = an individual or an entity seeks to increase their own wealth without creating any benefits or wealth to the society
28
What is Thomas Piketty's main argument?
High levels of inequality are evident, and wealth is often inherited, perpetuating inequality.
29
What is 'rent seeking'?
It is a practice by the wealthy to wield political power that shapes monopolies, obtain favorable treatment, and ensure low taxes.
30
How does inequality perpetuate itself?
Inequality transfers across generations since wealth is inherited.
31
What are the effects of inequality on productivity?
Inequality is arguably unfair and hurts productivity by suppressing aggregate demand.
32
What are Thomas Piketty's main points in 'Capital in the 21st Century'?
He provides clear evidence of high levels of inequality and discusses policy responses like direct redistribution and fiscal redistribution.
33
What is the preferable policy response according to Piketty?
Fiscal redistribution is preferable since increasing the cost of labor through direct distribution can increase unemployment.
34
What does empirical evidence suggest about capital to labor elasticity?
Empirical findings show that capital to labor elasticity is low, meaning taxing capital does not significantly reduce employment.
35
What will happen to inequality according to Piketty?
Inequality will increase since the return on capital growth will outstrip/outpace growth in the economy.
36
What are the two options for fiscal redistribution?
Tax capital (interest, dividends- inheritance taxes) or labor income (Wages, salaries)
37
What issues arise from taxing capital?
Capital is internationally mobile, and tax competition makes capital highly elastic.
- Capital can move across borders easily- Money, factories, and profits can be shifted to where they need
- Because countries compete on taxes, capital is “highly elastic.”
38
What is the proposed solution for taxing wealth?
Fiscal federalism, a progressive global tax on wealth.
39
How much inequality is considered inevitable?
Some degree of inequality is inevitable, and even Karl Marx acknowledged this.
40
What are the consequences of large wealth inequalities?
They can lead to public bads like labor shortages, crime, and revolution.
- most relevant example is unemployment
41
What is procedural fairness?
It refers to fair processes in situations like races, where equal starting lines and no unfair advantages are essential.
42
What is the Social Contract?
Ideas developed by philosophers about the legitimacy of the state over the individual, where individuals consent to surrender some freedoms for protection.
43
What did Hobbes say about the state of nature?
He described it as 'solitary, poor, nasty, brutish, and short.'
44
What is John Rawls' concept of horizontal equity?
People that are alike in relevant ways should be treated the same.
45
What is vertical equity according to Rawls?
People who differ in relevant ways should be treated differently based on need, deservedness, contribution, or effort.
46
What is the 'veil of ignorance'?
A concept by Rawls where one must design rules without knowing their own position in society.
47
What is the maximin principle?
It is a preference for the welfare of the least advantaged.
48
What does Harper Lee's quote from 'To Kill a Mockingbird' suggest?
Understanding others requires seeing things from their perspective.
49
What is individual sovereignty?
The right to make personal choices.
50
What is paternalism?
Placing limits on a person's liberty for their own good.
51
What are examples of paternalism?
Restrictions on narcotics, activities of minors, and safety requirements like seat belts.
52
What are problems with utility functions?
They may not be rational, as individuals often overlook long-term costs or benefits.
53
Should we maximize social welfare for current or future humanity?
There is a tendency to undervalue humanity's future, leading to potential paternalism for future generations.
54
What is the challenge of cost/benefit analysis for social welfare?
It involves accounting for uncertainty and choosing appropriate discount rates.
55
What does fairness perception imply?
Perceptions of fairness are crucial and can be distorted, impacting distributional and procedural fairness.
56
What is vertical ethics?
It refers to rewarding participation in class, where more participation leads to higher marks.
57
What is Stiglitz's main point?
Money makes money.
58
What does NIMBY stand for?
Not In My Backyard.
59
What is the relationship between trade and social welfare when a negative externality is present?
Trade does not increase social welfare under negative externalities.
60
What is necessary for market prices?
Prices are set by the market; entry by new firms drives profits to zero.
61
What does it mean for resources to be efficiently allocated?
It is impossible to reallocate resources to make one person better off without making someone else worse off.
62
What does it mean for a good to not be a public good?
It is not a public good just because it is provided free to the public or by a publicly owned enterprise.
63
What characterizes non-rival goods?
The benefits obtain by one ‘consumer’ are not subtracted from benefits available to others
64
How do insurance firms and clients differ in terms of risk?
Insurance firms are risk neutral while clients (policy-holders) are risk averse.
65
What are the Four “isms”
1. Relativism
2. Consequentialism
3. Egoism
4. Utilitarianism
66
What is Relativism
There is no absolute right or wrong but we can say acts are morally acceptable so long as they conform to my society’s approved practices.
67
What Is Consequentialism
Acts are good if they have good consequences.
68
What is Egoism
Acts are good if they benefit me.
69
What is Utilitaism?
Acts are good if they can be expected to raise the sum of all human welfare.
70
What are the 4 rules
1. Golden Rule
2. Kant’s 1st Rule, the Categorical Imperative:
3. Kant’s 2nd Rule, the Practical Imperative:
4. Ethics of Care
71
What is the Golden Rule?
Do unto others as you would have others do unto you.
72
What is Kant’s 1st Rule?
The categorical imperative, that says act according to principles that are universalizable.
73
What is Kant’s 2nd Rule?
The practical imperative, which means do not treat people purely as a means.
74
What does the Ethics of Care emphasize?
Act according to duties of care.
75
What is relativism in ethics?
Moral standards often differ across cultures.
76
What is conventionalism?
It is right to do whatever immediate social environment dictates.
77
What is a problem with relativism?
Moral views differ within societies (sub-cultures, individual dissent).
78
What is consequentialism?
The morality of an action depends solely on the consequences it brings about.
79
What are the two main versions of consequentialism?
Utilitarianism and Egoism.
80
What does utilitarianism focus on?
Maximizing everyone's good, defined as utility/happiness/pleasure.
81
What does egoism focus on?
Maximizing the individual's own good.
82
What is ethical egoism?
Moral agents should do what is in their self-interest.
83
What is psychological egoism?
Self-interest is what motivates people in fact.
84
Who is a champion of ethical egoism?
Ayn Rand.
85
What is a key quote from Ayn Rand?
"I swear by my life, and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine."
86
What does Rand argue about altruism?
It requires sacrificing the individual for the good of others, thus destroying the highest value.
87
What is the Sabre-tooth Tiger Dilemma?
A scenario illustrating the risks of cooperation versus self-preservation when faced with danger.
88
What is Direct redistribution
increasing wages
89
What is Fiscal redistribution
tax on capital or labour income
90
Why do we choose fiscal over direct
cause increasing cost of labour through direct distribution increases unemployment
91
What is the problem with fiscal redistribution?
capital is internationally mobile and tax competition makes capital highly elastic
92
What is fiscal federalism
the solution in Thomas Piketty's eyes, a progressive global tax on wealth
93
94
What is the **scientific evidence** regarding the evolutionary success of humans?
It is largely due to **cooperation and altruism**
## Footnote
Psychological egoism in its extreme form is inconsistent with the data.
95
What does **bad luck** (health, natural disasters, etc.) significantly affect?
**Well-being**
## Footnote
It raises the question of whether we should care about the unfortunate.
96
In **Prisoner’s Dilemma** situations, what does egoism lead to?
**Both parties being worse off** than they might be under cooperation
## Footnote
This highlights the importance of cooperation over egoism.
97
Who is the founder of **utilitarianism**?
**Bentham**
## Footnote
He stated that the measure of right and wrong is the greatest happiness of the greatest number.
98
What are the **ultimate ends** that we value for themselves according to utilitarianism?
* Happiness
* Pleasure
* Absence of pain and misery
## Footnote
These are the goals that utilitarianism aims to achieve.
99
Whose happiness should count according to utilitarianism?
**Everyone that can feel happiness**
## Footnote
This principle emphasizes the equal consideration of all individuals' happiness.
100
What is the principle that the **needs of many** outweigh?
**The need of few or the one**
## Footnote
This is a fundamental concept in utilitarian ethics.
101
What is a significant problem for **utilitarianism** regarding involuntary sacrifices?
**The trolley problem**
## Footnote
It raises ethical dilemmas about sacrificing one to save many.
102
What ethical issue arises from utilitarianism regarding **torture**?
**Justified torture**
## Footnote
This is a controversial aspect of utilitarian ethics.
103
What does utilitarianism struggle with in terms of **equal treatment**?
**Innocent and guilty, family and strangers**
## Footnote
It often leads to sacrificing one to save five, regardless of personal connections.
104
What must moral rules satisfy to be accepted into society?
* **Universality**
* **Reversibility**
## Footnote
These criteria ensure that moral rules are fair and applicable to all.
105
What is the **Golden Rule**?
**Do unto others as you would have others do unto you**
## Footnote
This principle emphasizes empathy and reciprocity in moral actions.
106
What is **Kant’s 1st Rule**, the Categorical Imperative?
**Act according to principles that are universalizable**
## Footnote
This rule emphasizes the need for moral principles to be applicable to everyone.
107
What is **Kant’s 2nd Rule**, the Practical Imperative?
**Do not treat people purely as a means**
## Footnote
This principle highlights the importance of respecting individuals' autonomy.
108
What does the **Ethics of Care** emphasize?
**Interpersonal relationships**
## Footnote
This ethical framework was developed by Carol Gilligan and others.
109
What is a key difference between the **Ethics of Care** and Kant's imperative?
The Ethics of Care may justify actions like **stealing food for your baby**, while Kant's imperative would not
## Footnote
This illustrates the conflict between different ethical frameworks.
110
What does the **principle of autonomy** relate to in Kant's philosophy?
**Informed consent**
## Footnote
This principle is crucial in ensuring that individuals are treated with respect and dignity.
111
What is a potential pareto improvement?
the overall gains of the better people off is greater then the loss of the people worse off
112
Milton Friedman
Society sets the rules for businesses, but within those rules, firms can do what they like (make as much money as they want).
113
Business must use its resources
Business must use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.
114
Miton does not think the following is CSR
Hiring workers that have been struggling for a long time to find jobs; Reducing pollution beyond the requirements of environmental regulations; Buying domestically produced goods to help boost economy and to create jobs; Making donations to communities or charities.
115
Profit maximization
If a firm is paying you, your primary duty is to the firm. Pursuing social responsibility other than profit maximizing is a form of 'taxation without representation.' Pursuing profit leads to pareto efficiency (invisible hand).
116
Corporate activity that aims to help the community
Corporate activity that aims to help the community but reduces profits is undemocratic because those decisions should be made through democratic process (political system).
117
Unwise because a businessperson
Unwise because a businessperson has no expertise to identify and fix social problems.
118
Ineffective because a manager
Ineffective because a manager that acts contrary to profit maximization might be fired or have customers desert to a less scrupulous firm.
119
Arguing with Friedman
Does not believe in market failure.
120
Kenneth Arrow
Created the 1st Welfare Theorem.
121
Negative externalities
Arrow focuses on pollution caused by the firm.
122
Asymmetric (imperfect) information
The firm knows more than the customer about the quality of the product. The firm also knows more than the worker about the safety of the workplace.
123
Potential solutions to market failure
Regulation: production standards, maximum emission levels, safety inspections, competition policy, etc; Taxes and subsidies: tax pollution, subsidize abatement; Legal responsibility: damage suits or 'torts'; Legislation for labour and consumer protection; Government produced goods when there are public goods or externalities (defense, healthcare, education, etc); Industry-led solutions such as guarantees, warranties, voluntary labelling, etc; Social responsibility: moral obligations to obey ethical codes.
124
CSR
CSR captures the responsibility of business to the environment, its stakeholders, and the broader society.
125
Doing well by doing good
Benefits the firm by benefiting society.
126
Shared value
Is where firms have benefit to their (financial) bottom line from CSR initiatives.
127
ESG investing
Is where investors invest in equities of firms that score highly on an ESG index.
128
Greenwashing
Firms appear socially responsible but without having much impact.
129
Triple bottom line
Is where firms expand their objectives beyond just making money to include having a positive impact on the environment and the community (People/Planet/Profit).
130
Unintended consequences
Is a great example of how laws to stop greenwashing is.
131
Example: Unilever
Training women to sell their products in rural communities.
132
Example of shared value
Example of shared value (for firm and society).
133
Example: Arcteryx
Ponchos for homeless, with old materials.
134
Approaches to CSR
In a 2009 article, 'Strategy and Society', Michael Porter argued that there were four justifications for CSR.
135
Moral obligation
Companies have a moral duty to do the right thing.
136
Difficulty balancing competing values
Difficulty balancing competing values, interests, and costs.
137
Sustainability
Companies should operate in ways to secure long-term economic performance by avoiding detrimental short-term behaviour.
138
Freedom to operate
Pragmatic approach where companies look to satisfy stakeholders.
139
Reputation
Companies do CSR to improve image, strengthen brands and enliven morale.
140
Problem: the approaches focus
The approaches focus on the tensions between business and society rather than their inter-dependence.
141
Solution
Strategically integrate CSR initiatives that affect society with the impact that society has on the firm.
142
Friedman questioned
Friedman questioned what he saw as a form of 'mindless' social responsibility.
143
Arrow's middle view
Arrow's middle view has merit: markets don't always get things right and ethics can play a role in making them work better.
144
Businesses are increasingly recognising
Businesses are increasingly recognising that paying attention to more than the bottom line is advantageous in the long term when there is 'shared value'.
145
Porter believes in a more strategic approach
Porter believes in a more strategic approach to CSR, integrating 'inside-out' and 'outside-in' practices.
146
CSR is not likely to be enough
CSR is not likely to be enough on its own to achieve better equity and sustainability.
147
Current economic system in China
Current economic system in China is formally titled 'Socialist market economy with Chinese characteristics.'
148
Political systems
Democracy- Citizen participation in the political system. Leaders are normally elected; Republic- Government is subject to the people, and leaders can be recalled; Monarchy- Monarch is head of state; Communism- System based on ideology of communism; Despotism- Rule by an individual or a group of individuals.
149
If (liberal) economists were kings
There would be minimal deadweight loss.
150
Normative Analysis vs. Reality
Normative analysis describes what should be implemented as policy, based on our theories of economics and fairness.
151
Democracy: Winston Churchill
Quote that all other types have been tried but democracy is the best.
152
Healthy democracy requires
An educated electorate to understand political, economic, and social issues; A free press (media); An independent judiciary to ensure politicians are held accountable.
153
Challenges for democracy
Conspiracy theories.
154
Liberal democracies need
Property rights to protect owners and investors from exploitation; Political rights to ensure that groups that win electoral contests can assume power and choose policies; Civil rights to guarantee equal treatment before the law and equal access to public services such as elections.
155
Illiberal democracy
An illiberal democracy, also called a 'partial democracy' or 'empty democracy', is a governing system in which, although elections take place, citizens are cut off from knowledge about the activities of those who exercise real power because of the lack of civil liberties.
156
Two forms of democratic decision-making
Direct (pure) democracy involves direct voting by individual citizens on alternatives; Representative democracy involves the election of delegates who are vested with the power to vote on alternatives and who represent the interests of individuals they represent.
157
Expense
Everyone incurs costs to voting on every issue.
158
Expertise/Specialization
Voters make lack expertise to judge some issues, and it is costly to become fully informed.
159
Aggregate preference problems
Voting does an imperfect job of revealing aggregate preferences because it does not account for differences in the intensity of individual preferences.
160
Self-interest for politicians
'Power corrupts absolutely'.
161
The persistent appeal for the benevolent dictatorship
The persistent reality of corrupt, self-serving and just plain evil dictators.
162
Median voter theory
The party that wins the election is closest to the middle.
163
Electoral systems
Majoritarian system: the winning candidate must have an absolute majority of votes (50>%). Plurality system: requires the winning candidate to receive more votes than any other candidate. Proportional system: an electoral system that ensures a fairly close relationship between the vote a party receives and the number of candidates it elected.
164
Dominated winner paradox
Imagine a parliament composed of 100 MPs elected from ridings with equal populations. Assume: 51% of the electorate in 51 of the ridings favour the Liberal Party; 100% of the electorate in the remaining 49 ridings favour the Conservative Party. In an election, the Liberal Party wins the majority of seats even though it is a minority choice of the total electorate, with only 26% of the vote.
165
Problem for Alberta
All conservative; Not much seats; Causing Alberta to be upset.
166
Gerrymandering
Manipulating the boundaries of an electoral constituency so as to favour one party.
167
Voter suppression
Discouraging or preventing specific groups from voting.
168
Voter manipulation
Installing partisan officials who can manipulate vote counting.
169
Advantages to our Canadian system
Encourages fewer, larger and more inclusive political parties; Tends to produce majority government; Maintains a direct link between a local representative and his or her constituency; Is simple to use and understand.
170
Summary of democratic voting
The two main types of democracy are direct democracy and representative democracy. While voting seems like a 'fair' process, different voting schemes can yield different outcomes.
171
Transfer seeking
Also called rent-seeking, it is the process of using resources to distribute wealth from others, rather than create new wealth.
172
Consequences
There is a transfer of wealth to the rent seeker; Resources consumed in rent-seeking are wasted; The policy induced by rent seeking usually has a pure waste associated with it.
173
Examples of transfer seeking
Theft and other economic crimes; Most litigation and probably much of the financial market activity (insider trading); Business lobbying; War (over resources); Charity (this is usually considered to be beneficial transfer-seeking).
174
Economic interest groups (EIG)
Represents unions industries (restaurant associations), professions (engineers), and regions.
175
Social interest groups
Promote particular values or moral views (MADD).
176
Lobbying
Individual is paid to communicate with a public-office holder in attempt to influence government policy.
177
Free and open access to government
Is an important matter of public interest.
178
In summary
There are a number of main sources that create government policy failure.
179
Unelected decision makers
Pursue their own self-interest at the expense of public interest.
180
Voting outcomes
Can depend on the voting system.
181
Election integrity
Can be undermined through gerrymandering, voter suppression, and manipulating of counting.
182
The weakening of democratic institutions
Increases the likelihood of government failures.
183
Interest group activity
May convey useful information but is transfer seeking and is often detrimental to the public interest.
184
In essence
Democratic outcomes may not be efficient and fair.
185
Examples of environmental externalities
Oil sands leak cancer-causing chemicals into downstream water supplies.
186
Examples of environmental externalities
Air pollution caused by automobile exhaust and industrial emissions.
187
Examples of environmental externalities
Acid rain caused by automobile exhaust and industrial emissions.
188
Examples of environmental externalities
Ozone depletion is caused by chlorofluorocarbons (CFCs) which are used for refrigeration, foam, packaging, and aerosol cans.
189
Examples of environmental externalities
Global warming due to greenhouse gases (carbon particles from fossil fuel combustion).
190
Pollution is bad. The optimal amount must be zero. Right?
Usually not. Pollution is a by-product of activities that create desired goods.
191
What are some examples of abatement
Installation of scrubbers.
192
What are some examples of abatement
Waste treatment.
193
What are some examples of abatement
Carbon capture, utilization, and storage (CUSS).
194
What does the PMB of abatement mean?
Note that DWL of under-abatement.
195
Solutions to environment externalities
Property rights or internalizing the externality via unfired ownership (mergers).
196
Solutions to environment externalities
Legal remedies (torts) and regulation (quantity controls or standards).
197
Solutions to environment externalities
Taxes on polluting activities.
198
Solutions to environment externalities
Subsidies for abatement technologies.
199
Solutions to environment externalities
Creation of a market: tradable permits allocate 'pollution rights' that can be priced and traded ('cap and trade').
200
Solutions to environment externalities
Social responsibility. Utilitarian ethics.
201
Cap and trade
Government can reduce DWL associated with pollution by setting a maximum overall amount and issuing pollution permits.
202
Cap and trade
Like a quota, but firms can trade their pollution rights.
203
Cap and trade
Incentivizes pollution reduction, as firms that can easily reduce emissions can do so and sell their permits.
204
Cap and trade
Different options for initial distribution (auction or grandfathering), however, increase efficiency regardless of initial distribution options.
205
Cap and trade
Makes sense when firms differ in their marginal benefits and costs of emission.
206
Pigouvian taxes
When taxing goods, govt gets revenue but at the cost of DWL.
207
Pigouvian taxes
When taxing bads, govt gets revenue while reducing DWL.
208
Pigouvian taxes
BC has been very progressive by creating a carbon tax.
209
Pigouvian taxes
BC carbon tax is revenue neutral and there is evidence to suggest it has had a positive effect on the economy.
210
Pigouvian taxes
A federal carbon tax was recently implemented in Canada. It is currently $50/ton and is set to rise to $170/ton by 2030.
211
Pigouvian taxes
Taxes tend to be unpopular! Australia implemented a carbon tax of $23/ton in 2012 and then repealed it in 2014.
212
Setting the right tax
Recall that an externality is caused by SMC > PMC.
213
Setting the right tax
SMC = PMC+X, where X is the external damage cost.
214
Setting the right tax
Suppose we set a pollution tax of t = x.
215
Setting the right tax
Then the new effective PMC becomes PMC+t=PMC+X. PROBLEM SOLVED.
216
Setting the right tax
However it can be difficult to measure x!
217
Setting the right tax
Note that taxes will not be effective if demand is inelastic (e.g. a lack of substitutes) and there are often fairness issues (relatively high costs to low income earners).
218
The geography and jurisdiction of externalities
An important difference between pollution externalities is whether they are local or global.
219
The geography and jurisdiction of externalities
Particulate air pollution: mainly local.
220
The geography and jurisdiction of externalities
Acid rain: cross-border.
221
The geography and jurisdiction of externalities
CFCs and GHGs: global.
222
The geography and jurisdiction of externalities
With global externalities, even rational governments may set taxes too low.
223
To respond to global externalities
We usually need global agreements (sometimes called protocols).
224
History of Easter Island
400AD - Small group of Polynesians 'settle'.
225
History of Easter Island
1100 - Moai carving begins.
226
History of Easter Island
1400 - Population peaks at 10,000.
227
History of Easter Island
1500 - Moai carving abruptly stops. Strong evidence of cannibalism.
228
History of Easter Island
1550 - Population unknown, possibly ∼ 500.
229
History of Easter Island
1722 - First contact with Europeans. Population ∼ 3,000.
230
History of Easter Island
1774 - James Cook arrives. Population 2,000.
231
History of Easter Island
1862 - Population 3,000. Slave traders invade, take 1/3.
232
History of Easter Island
1870 - Some slaves return and bring smallpox.
233
History of Easter Island
1877 - Population 111.
234
What happened to the Rapa Nui people on Easter Island at around 1500AD?
Forest timeline: 400AD - Island is a forest.
235
What happened to the Rapa Nui people on Easter Island at around 1500AD?
900AD - Forest reduction notable.
236
What happened to the Rapa Nui people on Easter Island at around 1500AD?
1400 - Forest entirely gone.
237
What happened to the Rapa Nui people on Easter Island at around 1500AD?
The islanders ate mostly fish and birds. The birds nested in the forest. Some agriculture. The islanders used wood for: Building and moving Moai, Housing, Canoes and fish entrapments, Tools, Firewood.
238
Why only Easter Island?
Relatively cool climate, less rainfall.
239
Why only Easter Island?
Jubea Chilensis is dominant species of palm tree.
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Why only Easter Island?
40-60 yrs to reach fruit-growing stage.
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Why only Easter Island?
Rest of Polynesia: Warmer climate.
242
Why only Easter Island?
Cocos (coconut palm) and Prichardia (Fiji fan palm) are dominant.
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Why only Easter Island?
7-10 years to reach fruit-growing stage.
244
A Simple ‘Population’ Model
In order to think about renewable resources (think fish, trees, etc.) we need a simple model that captures the following sequence of events: To start with an entity reproduces without competition.
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A Simple ‘Population’ Model
With more of the entity, there is more reproduction.
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A Simple ‘Population’ Model
Crowding effects kick-in: newborn entities must compete with large existing entity stocks for survival.
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A Simple ‘Population’ Model
Eventually the stock of entities reaches its maximum size where growth is zero. This is called the ‘carrying capacity’.
248
Doing the math
Suppose: G is the growth (births - deaths) of a stock.
249
Doing the math
r is the intrinsic growth rate of the stock (absent ‘competition’).
250
Doing the math
K is the carrying capacity.
251
Doing the math
G S is the growth-rate of the stock.
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Doing the math
M is the point where the crowding effect is such that the change in the growth amount is zero.
253
Harvest Equilibria
We could harvest at an amount H1 at stocks SL or SH, or at an amount H2 at stock level M.
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Harvest Equilibria
All three appear sustainable as the harvesting is equal to growth.
255
Harvest Equilibria
However, Harvesting H1 at SH is stable.
256
Harvest Equilibria
If there is a shock that reduces stocks, the growth amount is above the harvesting amount and the equilibrium will self-restore.
257
Harvest Equilibria
Harvesting H1 at SL is unstable.
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Harvest Equilibria
If there is a shock that reduces stocks, the growth amount is below the harvesting amount the stock will be driven to extinction.
259
Harvest Equilibria
Harvesting H2 at M is semi-stable.
260
Harvest Equilibria
If there is a shock that reduces stocks, the harvesting amount will exceed the growth amount and so in the next period the stock will fall again unless the harvest is dramatically reduced.
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Factors Affecting Harvest Choices
What are the factors we should consider? What’s the intrinsic growth rate? High for fish, medium for trees, very, very low for oil.
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Factors Affecting Harvest Choices
How big/common are the shocks and how good/costly is the monitoring?
263
Factors Affecting Harvest Choices
Is it economic to use the resource? (harvesting costs high, demand low).
264
Factors Affecting Harvest Choices
Is it economic to save the resource? (harvesting costs low, current value very high, growth rate low).
265
Factors Affecting Harvest Choices
Should we fully deplete it? Cyclical management: we might want to over-harvest some years and under-harvest other years.
266
Why did we deplete the Grand Banks to zero?
Tragedy of the Commons: Lack of property rights leads to an over-use of a common resource.
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Why did we deplete the Grand Banks to zero?
Open access problem: With resources that are commons goods (rival and non-excludable) there is over-harvesting.
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What happened to the Cod?
1. Tragedy of the Commons: Over-grazing by countries of a shared resource.
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What happened to the Cod?
2. Property-rights assignment: In 1977 national jurisdiction extended from 12 to 200 miles from the coast.
270
What happened to the Cod?
3. Open access problem: Harvests are hard to control if preventing access and policing is difficult or impossible.
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What happened to the Cod?
4. Information problems: We didn’t know the size of the resource (or the size of its shocks).
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What happened to the Cod?
5. Transfer-seeking: Atlantic-Canada lobbies for greater fishing quotas.
273
What happened to the Cod?
Spanish fishermen fish Canadian waters (stealing).
274
What happened to the Cod?
The cod fishery was closed in 1992. Fish stocks started to recover but fishing has resumed and stocks have been stagnant since 2017.
275
Key lessons
With renewables, sustaining the resource is possible, but requires careful management.
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Key lessons
If harvests remain persistently over the 'tipping point' the resource stock will collapse (as seen with Grand Banks cod).
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Key lessons
Exercise caution: stocks are hard to measure, harvests hard to control. Keep H ≪ G¯ and S ≫ M.
278
Part 2
The natural resource industry accounts for 17% of Canada’s GDP.
279
Part 2
The CIA Factbook lists 18 natural resources for Canada: iron ore, nickel, zinc, copper, gold, lead, rare earth elements, molybdenum, potash, diamonds, silver, fish, timber, wildlife, coal, petroleum, natural gas, hydropower.
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Part 2
How many of these are considered renewable?
281
4 Non-renewable resources
Fossil fuels and minerals do not renew themselves in human time frames.
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4 Non-renewable resources
Thus it is impossible to exploit them in a way that sustains the stock for future generations.
283
Sustainable standard of living
(Hartwick’s rule) requires investments in productive assets to make up for resource depletion.
284
Hartwick’s Rule, Norway & Alberta
The goal of Hartwick’s rule is to keep the citizens from falling into poverty when natural resources are exhausted.
285
Hartwick’s Rule, Norway & Alberta
Invest all the surplus profits generated by resource extraction into various forms of capital.
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Hartwick’s Rule, Norway & Alberta
Norway’s Government Pension Fund Global is funded by Norway’s oil export revenues.
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Hartwick’s Rule, Norway & Alberta
In 2021 it was worth $1.3tr, or $248,000 per Norwegian citizen.
288
Hartwick’s Rule, Norway & Alberta
Alberta Heritage Savings Trust Fund has just $17bn, about $3,900 per person.
289
Thomas Malthus
Key point: Population grows geometrically whereas food production increases arithmetically.
290
Thomas Malthus
Population pt = 2pt−1 . . . 2 4 8 16 32 . . .
291
Thomas Malthus
Food ft = ft−1 + 2 . . . 6 8 10 12 14 . . .
292
Thomas Malthus
(1) Population grows until it can’t feed itself.
293
Thomas Malthus
War, pestilence and famine act as restraining mechanisms.
294
Have we escaped the Malthusian Trap?
Birth-rates lower due to improved healthcare, nutrition, educated parents, etc.
295
Have we escaped the Malthusian Trap?
Technological improvements to food production.
296
Have we escaped the Malthusian Trap?
Better institutions to prevent war.
297
Have we escaped the Malthusian Trap?
Medical developments to reduce disease.
298
World population has increased
Your Mineral (metals and fuels) Use 3.7m lbs = 1,650 tons.
299
World population has increased
50 students × 1,650 = 82,500 tons.
300
The uss orrestal
Total displacement: 59,650 tons.
301
Carrying Capacity of Planet Earth
What’s the carrying capacity of humans on planet earth?
302
Carrying Capacity of Planet Earth
Estimates vary wildly: 4b-16b, median of 10b (UN 2001).
303
Carrying Capacity of Planet Earth
With resource depletion, typical estimates are 1b-4b.
304
Carrying Capacity of Planet Earth
Even within carrying capacity: animal and plant species will go extinct, certain resources will be consumed to zero, etc.
305
Carrying Capacity of Planet Earth
Probably we are already exceeding the carrying capacity and so placing population stresses on our species.
306
If not we surely will do in our lifetimes.
307
Introducing the Prophets!
William Vogt and the modern environmental movement.
308
Introducing the Prophets!
Only reducing consumption and limiting population will save us.
309
Introducing the Prophets!
Affluence is not our greatest achievement but our biggest problem.
310
Introducing the Prophets!
Unless we change, the unavoidable result will be environmental destruction.
311
Introducing the Prophets!
Cut back, cut back!
312
Introducing the Wizards!
Norman Borlaug and the Green Revolution.
313
Introducing the Wizards!
Science and technology, properly applied, will save us.
314
Introducing the Wizards!
Green movement of 1960s: High yielding crop varieties and agronomic techniques increased grain harvests averting tens of millions of deaths.
315
Introducing the Wizards!
Only getting richer and more knowledgeable will resolve our environmental crises.
316
Introducing the Wizards!
Innovate, innovate!
317
Location of Bads
Waste, hazardous materials, and other undesirable materials need to go somewhere for storage or elimination. But where?
318
Location of Bads
The NIMBY problem is that the relatively small number who live near to a toxic waste dump bear high costs.
319
Location of Bads
Meanwhile the benefits accrue to a much larger but spread out group who are far from the waste site.
320
Location of Bads
Locate waste where it generates the lowest costs.
321
Location of Bads
Those who bear those costs should be compensated by the rest.
322
Location of Bads
In practice, the political struggle over where to place bads can yield outcomes that are inefficient, unfair, or possibly both.
323
Which of these does NOT provide an example of a NIMBY problem?
E Bus stop.
324
International Problems
Policy can only solve problems if it is possible to assign property-rights, levy taxes, impose standards/quotas, internalize externalities, or provide public-good (removal of public-bad) services.
325
International Problems
However, there is no international government!
326
International Problems
There is often transfer-seeking by countries, particularly given that monitoring is difficult.
327
International Problems
Many global problems are prisoner’s dilemma situations, where all countries would be better off if they cooperated but each country acting in their own interest makes everyone worse off.
328
Reasons to be cheerful? Ozone and CFCs
Policy is slow, but can work to solve international problems if the stakes are high enough.
329
Reasons to be cheerful? Ozone and CFCs
The timeline for CFCs provides an example: 1930’s: CFC discovered. They are cheap, easy to produce, and non-toxic.
1970’s: Scientists speculate that CFCs might deplete ozone.
1985: Evidence of an ozone hole above the south pole is found.
1987: 24 Countries sign the Montreal Protocol to cut CFCs by 50% by 1998.
2003: CFCs virtually eliminated in Canada.
2050: Atmosphere should regenerate to 1985 levels.
330
Can exploiting non-renewable resources be done sustainably?
Exploiting non-renewable resources cannot be done sustainably, however some of the wealth can be reinvested in other types of capital (Hartwick’s Rule).
331
What is going to happen to the worlds growing population?
The world’s growing population will likely be restrained by depleted natural resources.
332
How do we address our environmental crises?
The ‘Prophets’ and the ‘Wizards’.
333
What is the NIMBY problem?
The NIMBY problem is a barrier to achieving efficient outcomes and can also have fairness issues.
334
What do international problems require?
International problems require collective agreements from national governments.
335
What demonstrates that it is possible to address global problems?
CFC’s and the Ozone layer
336
How much has our planet warmed already, on average, since the beginning of industrialization (1850-1900)?
C 1.5 celsius.
337
Compared to 1850, how much more carbon dioxide is in our atmosphere today?
B 40%.
338
What is considered by climate researchers as a “safe” level of GHG concentrations in our atmosphere?
A 350ppm.
339
If our planet warms by 2–3 degrees celsius, what percentage of our plants and animals are NOT likely to survive?
D 20%–30%.
340
Evidence of Climate Change
1. Global Temperature Rise Earth’s average surface temperature has risen about 1.5◦C since the late 19th century.
2. Most of the warming occurred in the past 35 years.
3. A 2019 federal government report has found that Canada is warming at twice the average rate of the rest of the rest of the world.
4. Canada’s arctic has already risen by 2.3◦C and the rest of Canada has warmed by 1.
341
What percentage of our plants and animals are NOT likely to survive?
D 20%–30%
342
Global Temperature Rise
Earth’s average surface temperature has risen about 1.5◦C since the late 19th century. Most of the warming occurred in the past 35 years. A 2019 federal government report has found that Canada is warming at twice the average rate of the rest of the world. Canada’s arctic has already risen by 2.3◦C and the rest of Canada has warmed by 1.7◦C.
343
Warming Oceans
The oceans have absorbed much of this increased heat, with the top 700 meters of ocean showing warming of more than 0.2◦C since 1969. The upper few meters of the ocean increase by ≈ 0.13◦C per decade over the past 100 years.
344
Shrinking Ice Sheets, Declining Arctic Sea Ice
The Greenland and Antarctic ice sheets have decreased in mass. Data from NASA’s Gravity Recovery and Climate Experiment show Greenland lost an average of 281 billion tons of ice per year between 1993 and 2016, while Antarctica lost about 119 billion tons during the same time period. The rate of Antarctica ice mass loss has tripled in the last decade.
345
Glacial retreat & Decreased Snow Cover
The disappearing snow cap of Mount Kilimanjaro, from space. Glaciers are retreating almost everywhere around the world — including in the Alps, Himalayas, Andes, Rockies, Alaska and Africa. Satellite observations reveal that the amount of spring snow cover in the Northern Hemisphere has decreased over the past five decades and that the snow is melting earlier.
346
Sea Level Rise
Global sea level rose about 20cm in the last century. The rate in the last two decades, however, is nearly double that of the last century and is accelerating slightly every year. Estimates range 2-11m in 500 years; 0.2-2.5m in 100 years.
347
Ocean Acidification
Since the beginning of the Industrial Revolution, the acidity of surface ocean waters has increased by about 30%. Carbon dioxide is being absorbed into the oceans, with the upper layer gaining about 2 billion tons per year. Ocean acidification destroys ecosystems such as the Great Barrier Reef.
348
Extreme Events
The number of record high temperature events has been increasing, while the number of record low temperature events has been decreasing, since 1950. Increasing numbers of intense rainfall (heavy downpours), drought, floods, hurricanes (intensity, frequency).
349
Coffee growing conditions
Coffee requires specific conditions to grow: Arabica beans require a steady 18-21 Celsius, dry conditions to build up buds, and rain to trigger flowering; if it rains too much, the fruit don’t set.
350
Tipping Points and Feedback Loops
Tipping points: thresholds that make a system change from one to another qualitative state. Threshold behaviour is based on self-reinforcing processes or “feedback loops.” Melting ice bodies: albedo effect (water is darker than ice). Changing ocean circulation: e.g., shutdown of Atlantic thermohaline current. Changing air circulation: jet streams weakening or slowing down can lead to persistent weather systems and more extreme weather. Threatened large-scale ecosystems: e.g., boreal forests can turn to scrub or grassland ecosystems, releasing large amounts of CO2.
351
Kyoto Protocol
Signing nations agreed to reduce GHG emissions to 5.2% below 1990 levels. The US would not ratify the agreement. Developing countries such as India and China were excluded. No penalties for non-compliance! Many signers did not meet their commitments: Canada was 24.2% above 1990 levels in 2003, also Spain, Portugal, Greece, Ireland above. But some did: Russia, Germany (21%), England (13%) below 1990 levels. Overall developed countries 5.9% down. Canada pulled out of Kyoto at the end of 2011.
352
Paris Agreement
2015 UN Climate Change Conference aims to limit global warming to less than 2 deg Celsius above pre-industrial levels. “Binding” as at least 55 countries, together representing at least 55% of emissions, signed by April 2017. However countries can withdraw. Like Kyoto, no penalties for non-compliance.
353
Paris Agreement critics
Some critics say that it is also too vague and doesn’t do enough for the poor. The New Scientist suggests that it might help in limiting temperature increase to 4 degrees. Following the 2016 and 2024 elections of Donald Trump, the US withdrew from the agreement. The US accounts for over 15% global emissions. There have been a number of recent follow up rounds (COP27, COP28, etc) to try to accelerate action towards the goals of the Paris Agreement.
354
Policy response to global warming (1)
Michael Mann in his book ‘The New Climate War’ argues for the following: Special interest groups influencing government policy are an important reason for slow climate action. Widespread carbon pricing is necessary. Allow renewable energy to compete fairly with fossil fuels (e.g. removing subsidies for oil and gas). False arguments should be debunked (e.g. “it’s up to individuals”). We need to combat climate “doomism”.
355
Policy response to global warming (2)
Relying on technology for a solution is very risky. Significant GHG reductions are very advisable: if we have no climate policies, we could have over a 5 degree increase by 2100 which would be completely catastrophic. Likely to reach a tipping point where previous state is unrecoverable. Feedback loops are a key reason for the uncertainty around the effects of climate change. A key challenge is how we can improve commitment to the goals set out in the Paris agreement and overcome the Prisoner’s Dilemma problem. Global inequality will increase as a result of climate change. Resources are needed for those most impacted.
COMM 394
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