7. The sustainability standard

Question 1

What is a stock pollutant? and what is a good example?

Answer 1

A pollutant that has long term consequences to the environment. Eg. All Americans carry residue of pesticide DDT in their fat cells even though it was banned in the early 70s.

Question 2

What are flow pollutants?

Answer 2

They are pollutants that do damage relatively quickly and are either then diluted to harmless levels or transformed into harmless substances, eg. smog, noise or heat pollution.

Question 3

What is another way that people modify the environment?

Answer 3

Through natural resource use and exhaustion of environmental resources.

Question 4

What are natural resources?

Answer 4

inputs into the economy which can be renewable (water, wood, fish and soil) or non-renewable (minerals, oil and the genetic code in species)

Question 5

What does natural capital refer to?

Answer 5

The natural resource stocks, environmental quality and the environment to assimilate pollutants.

Question 6

What are the four types of capital that comprise the basis for producing goods and services needed for human well-being?

Answer 6

1) natural capital
2) manufactured capital (new industrial plants and machinery)
3) human capital (education and experience of workers)
4) social capital (important trust among members of society).

Question 7

A sustainable economy depends on what?

Answer 7

The degree to which increases in manufactured capital in particular can substitute for reductions in the stock of natural capital.

Question 8

What is sustainability?

Answer 8

It is the ‘non-declining utility’ for the typical member of all future generations.

Question 9

What is weak sustainability?

Answer 9

Weak sustainability occurs when substitution is still generally possible, so therefore achieving sustainability does not require any particular form of capital to be conserved eg. we can use oil as the future will substitute a different form of energy.

Question 10

Which side of economists believe in weak sustainability?

Answer 10

Neoclassical economists, ie they believe that manufactured capital can generally substitute for natural capital to produce the goods and services people need. Ie we are not running out of resources (or sinks) rather that as the resource runs out or becomes low, prices will go up and human innovation will find an alternative.

Question 11

What is strong sustainability?

Answer 11

It requires many forms of natural, human, social and manufactured capital and believes that it must be preserved, if not enhanced to protect the well-being of future generations.

Question 12

Who is an advocate of strong sustainability?

Answer 12

Ecological economists, because they believe that manufactured capital is not generally a good substitute for natural capital.

Question 13

Why are ecological economists generally considered to be technological pessimists?

Answer 13

Because recent developments are possible only through unsustainable use of natural capital. New innovation may not save us and has unintended consequences (pollution and resource depletion). The want to protect a dwindling stock of natural capital.

Question 14

Why is discounting important and what does it reflect?

Answer 14

Important to compare costs and benefits across time, discounting reflects the time value of money because investment is productive, society (and individuals) are better off having dollars today as they can be productively invested to increase the size of the economic pie for tomorrow.

Question 15

What is an environmental bond?

Answer 15

The putting aside of money today specifically to compensate future generations for pollution damages or depletion of natural capital.

Question 16

What are two examples of an environmental bond?

Answer 16

1) The Alaska Permanent Fund - $ set aside from oil revenue and put tot he benefit of current and future Alaskan generations
2) Bottle deposits - collection up front of a premium to help clean up problems or encourage recycling.

Question 17

Why is the posting of an environmental bond attractive?

Answer 17

Because it offers a rationale for spending less on prevention today than the full value of the damage inflicted on future generations.

Question 18

What is the formula for discounting?

Answer 18

PDV = $X/(1+r) to the power of T, where 
PDV is present value,
SX is the amount we expect
T is the number of years
r is the discount rate.

Question 19

What are the two impacts of a higher discount rate (interest rate) set?

Answer 19

• the less important are benefits down the road

- the more important are the initial expenses

Question 20

What is the difference between business men and policy makers in using discounting?

Answer 20

Businesses must take the market rate set (through the supply and demand of loanable funds), but policy makers use a discount rate for analysing policy decisions.

Question 21

Why are savings rates usually low (5% or less)?

Answer 21

The positive rate of time preference which is the desire to consume more today, regardless of the consequences for tomorrow. Higher time preferences will shift the supply curve of savings and therefore interest rates.

Question 22

So in summary, how are market interest rates determined?

Answer 22

1) the rate of return on investment (demand for loans)

2) the rate of time preference (premium that savers are offered to induce them to save).

Question 23

What is the Ramsay equation?

Answer 23

It is the basis for determining the social discount rate, which is the rate used by government when setting policies about pollution control and resource degradation. r=delta+ ng

Question 24

What does delta represent in the Ramsay equation?

Answer 24

delta is the rate of time preference

Question 25

What are ng?

Answer 25

n (eta) is the elasticity of the marginal utility of consumption, because of declining marginal benefits a $1 to a wealthier person will be worth less than $1 to a poor person
g (growth rate) of the economy. The higher the payoff of productive investment (g) the higher the opportunity cost of forgoing that investment, the more valuable dollars are today.

Question 26

What is dynamic efficiency? and what is required to achieve it?

Answer 26

it is the maximising of the net benefit s to future and current generations in decisions to use up or protect natural capital. If use properly, benefit-cost analysis will ensure this.

Question 27

What is a major argument between neoclassical economists and ecological economists with regard to the Ramsay equation?

Answer 27

What is the right discount rate to use? particularly if ‘g’ is greater than zero.

Question 28

What is the precautionary principle?

Answer 28

Similar to the safety standard, the precautionary principle requires the maximum politically feasible protection for natural capital.

Question 29

In assessing which resources to protect under the precautionary principle what three things need to be considered?

Answer 29

1) Uniqueness - do services provided by the natural capital have substitutes?
2) Uncertainty - what is the technological potential for substitution?
3) Irreversibility - if action is taken now - is it irreversible?
Where these items are satisfied the precautionary principle will dictate the protection of that natural capital.

Question 30

Provide an example of the application of the precautionary principle in practice?

Answer 30

The US Endangered Species Act and to the lesser extent the Environmental Impact Statement (EIS) process required by the National Environmental Policy Act (NEPA). The EIS requires negative environmental impacts and superior alternatives to be identified if federal agencies are involved in a project, but has little ability to ensure precautionary outcomes.