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CHAPTER OVERVIEW AND TEACHING TIPS This chapter applies the microeconomic theory that we have developed throughout the text to a real world problem How does an economy decide how to use its natural resources Societies have addressed this question for centuries some deciding that nature is wild and in need of taming through technology and others fearing the inherent power of nature and its mysterious forces In either case the situation calls for allocation of scarce resources so economists should be able to provide some answers Section I kicks off with discussion of Malthus and population growth and the impact of increasing population on living standards and environmental quality Section II presents some alternative ways of categorizing natural resources and describes market allocation mechanisms The final section addresses the problem of externalities which occur when production imposes costs on outside individuals or on society at large When externalities occur the market has failed because demand or supply cannot capture the true costs and benefits of actions As we learned in the last two chapters this tends to lead to a role for government in the marketplace Chapter 18 ties together many of the themes that you have been developing all semester It relies on an understand ing of allocation through the market mechanism on industrial structure and the impact of market failure on resource allocation and on the role of government when externalities occur and those externalities extend beyond local state and national borders You can use this material as a sort of capstone to the course and as a review of the concepts that you have taught LEARNING OBJECTIVES 1 Discuss reasons why the theory on overpopulation growth developed by Malthus has had such a great impact on the way people think about resource use Explain why Malthus s somewhat gloomy predictions have not come about 2 Describe the relationship between the economy and the environment as well as the relationship between a country s development and the quality of its natural environment 3 Differentiate between appropriable and inappropriable resources and between renewable and nonrenewable resources Explain how decisions concerning the optimal use of environmental resources differ depending on the category in which they fall 4 Review the path of resource prices over the past several decades Respond to the notion that resource prices should tend to increase as population increases and demand for those resources shifts to the right 5 Define the term externality Describe the mechanism by which inefficiencies develop in markets when external costs and benefits are present 6 Use cost benefit analysis to find the socially efficient quantity of pollution that will occur Construct a diagram that illustrates this decision making process Explain how contingent valuation might be used to place values on envi ronmental resources 7 Review alternative government policies that are designed to correct externalities such as emission fees markets for pollution permits private contracts and liability rules Compare the pros and cons of these alternatives 8 Discuss the difficult problems raised by global public goods SUGGESTED ANSWERS TO QUESTIONS IN THE TEXT 1 Renewable resources are those whose services are replenished regularly nonrenewable resources are fixed in total supply Renewable water forests nonrenewable fossil fuels 87 CHAPTER Protecting the Environment 18 2 An inappropriable resource is one whose use is free to the individual but costly to society Long Island Sound is an inappropriable resource because firms can dump trash in it for free but this dumping imposes a cost on the rest of society This is inefficient because externalities are imposed on a third party group that must pay a portion of the production costs even though they may not be involved in the market transaction 3 Compare the arithmetic progression 2 4 6 with the geometric progression 2 4 8 16 32 As long as the multiple used in the geometric progression is greater than 1 the geometric progression will always be greater than the arithmetic progression As the numbers get larger any multiple of those numbers will get larger Hence with a geometric progression the difference between the numbers is getting larger with an arithmetic pro gression the difference between the numbers is constant 4 Food production per capita would be given by the equation FPC Total Food Production Total Population If the numerator is increasing arithmetically while the denominator is increasing geometrically by your answer to 4 above the food per capita will eventually fall 5 Yes towns may have an incentive to compete for high quality residents using local public goods Towns with good schools and nice beaches will be more attractive to residents and firms that are looking to relocate Towns want to attract residents and firms that are going to bring tax dollars and other inputs to enhance the life of the com munity This indicates that we should return responsibility for these local public goods to the hands of local policy makers However in some areas inner city neighborhoods for example it is difficult to return responsibility to the residents who may be besieged by crime and other problems In Hartford Connecticut for example the local school board at one point turned responsibility for schools over to a private firm The point here is that local author ity in these areas is good but is not the answer for all communities 6 Use your own judgment on these 7 This technique is not too reliable since people have a tendency to overvalue an item that they do not actually have to pay for 8 a Although many economists in the U S like to rely on the market to solve problems most are willing to agree that externalities occur when markets fail That is environmental problems often occur when property rights are difficult if not impossible to define b Economists often recommend market solutions because they cause smaller distortions in the distribution of resources than would occur in a setting with full information However this does not mean that many economists fail to recognize the need for government mediated solutions in some cases c Economists often rely on the price mechanism because as mentioned above it leads to a more efficient alloca tion of resources However economists do recommend other sorts of solutions such as emissions fees in some instances d The most difficult economic questions involve achieving a balance between these two goals in distributing resources On the one hand most economists want to make the most out of a system s endowment of resources On the one hand many of us are concerned with distributing that endowment of resources in a fair way 9 See Figure 18 1 In this case what is best for each country individually leaves the world with a level of pollution that is higher than the social optimum In such cases a cooperative solution is more efficient than the competitive solution DISCUSSION QUESTIONS 1 Review the ideas that Thomas Malthus had about population growth What important factor did Malthus ignore 2 Consider the relationship between population and living standards Think of some areas of the world that have high populations and poor living standards think of some areas of the world that have high populations and high living standards 3 If a resource is inappropriable will market failure always occur Does the government always have to step in to allocate an inappropriable resource efficiently 4 Why is it that the prices of natural resources have not skyrocketed over the course of this century as a greater world population is now demanding greater and greater amounts of these resources 5 What is the difference between public and private goods Why can t private markets provide a good like national defense 88CHAPTER18 PROTECTING THEENVIRONMENT Figure 18 1 6 Use a diagram to illustrate the determination of a socially optimal level of pollution Does this mean that society desires some amount of pollution Why would this be 7 Compare alternative government policies designed to correct externalities What are the pros and cons of each 8 Why have markets for tradeable pollution permits become a popular solution for pollution problems What happens if a single firm buys all of the permits that exist 9 What is a global public good Explain why these externalities are so difficult to manage How did the Kyoto Protocol attempt to deal with the problem of a global public good 10 David Roodman writes But if the market s spontaneous origin has led many to underestimate its value the mar ket s power has dazzled others into overlooking its shortcomings The Natural Wealth of Nations New York W W Norton 1998 Interpret this statement What have market forces done for the standard of living in the U S this century What are the shortcomings of this progress ESSAY QUESTIONS 1 Throughout history technology has had incredibly important impacts on the way that we live and work In spite of the tremendous advantages technology brings it also carries problems and responsibilities What are some of these Why might unchecked technological advance cause social problems 2 What is the difference between renewable and nonrenewable resources During the 1970s OPEC an international oil cartel dominated the market for oil and controlled the world supply so as to keep prices high What happened to this cartel If oil is a nonrenewable resource how did OPEC lose control over the world market 3 Why has the world price of oil not skyrocketed in this century as more and more people are using this sour
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