13. Economic responses to sustainability issues Flashcards
Explain Adam Smith’s school of thought.
- Maximization of individual welfare contributes to maximization of social welfare
- Market takes care of an efficient allocation of scarce means
- The private costs and benefits equal social costs and benefits
- No specific consideration for natural resource scarcity as a limiting factor
Explain Malthus’ school of thought
- Introduced ‘environmental limits’
- Introduced an absolute scarcity limit: as population grows, scarcity in agricultural land reduces agricultural production. Standards of living are forced to down to subsistence level an de population stops growing.
- This will result in war, famine and starvation.
Explain Ricardo’s school of throught
- Claimed that economic growth declined in long run due to scarcity of natural resources
- Not because of absolute scarcity but because lack of good quality land/resources forcing society to move to poorer soils
- Emphasized technological innovation
Explain Stuart Mill’s school of thought
- Economic progress is a battle between diminishing returns in agriculture and technological change
- Technology delays constraints imposed by resource scarcity, which not necessarily a rapid disaster
- More optimistic about technological progress
According to neo-classical economics, why may an optimal resource allocation not happen?
Market failures
How is value determined in neo-classical economics?
Product cost and preference
What is the role of externalities in classical economics?
They were ignored.
When did natural resources enter neoclassical models?
1970s
What does Hotelling’s rule describe?
The time path of natural resource extraction which maximizes the value of the resource stock.
What characterizes an environmental economist?
- View the earth’s natural capital as a subset of a human economic system
- Tend to believe that market adjusts and corrects for scarcities of resources and pollution
- Technological optimists: technological possibilities will emerge to substitute between man-made and natural capital
- Prefer to internalize external environmental and social effects in market prices
- Strong proponents of economic instruments in solving environmental problems.
What characterizes an ecological economist?
- View the economy as a subset of the biosphere that depends heavily on the earth’s irreplaceable natural resources
- Often seen as doomsayers, according to Pieter
- Technological pessimist, cannot substitute man-made capital sufficiently for natural capital
- Assume that resources are limited and we should set absolute limits in use through precautionary principle
Give 3 examples of market failures
- Externalities
- Imperfect competition
- Absence of markets
- Presence of public/common goods
- Property rights incompletely assigned
- No perfect information
- Some consumers act irrational and do not maximize utility
- High transaction costs
Name three ways in which one can correct for market failures.
- Internalisation: external cost internalised as private costs
- Negotiation between polluter and victim (Coase theorem)
- Regulation (government intervention/policy), includes market based instruments
What is the Coase theorem?
A conflict solution based on negotiation between polluter and victim.
What are the two requirements to apply a Coasian solution?
- Enforceable property or user right
- Zero or low transaction costs
