Exercise set knowledge Flashcards
How is green growth possible when looking at I = P * A * T. Give a short introduction to the factors
I = impact, measured as mas volume of ressource use or waste
P = population
A = Per capita affluence (income)
T = technology, amount of resource use or waste per unit of income
Green growth is possible if I is systematically falling over time at the same time A is increasing. Ideally our wealth would increase and the impact on the environment falls.
Explain the relationship between P and A using a graph. Pleas draw it.
Using the thory from the demographic transition we can try to explain the relationship between population (P) and income (A). The theory suggest a negative correlation btween P and A, meaning when income increases over time population growth will decrease.
We can explain this by using figure 1 in Note 1. Here we have devided the graph in for income stages, with declining birth- and deathrates.
Stage 1:
Low income and high population growth, due to birth and death rates.
Stage 2:
Increasing income stregthen nutrition and public healthcare, leading to lower doeath raates and rapid population growth. Here the negative correlation hasn´t appeared yet.
Stage 3:
We start to se a drop in birthrates possible due to
- Increasing costs of having a child - Reduced benefits of having a big family - Increasing opportunity costs of home employment. Women could earn more on the labor market. - Improved economic and social status of women
The drop in dirthrates lead to falling popolutation growth rates.
Stage 4
High income economy with equal low birth and death rates therefore a constant populations size.
What is the different perspectives on the relation between A (income) and T (technology, amount of ressource use ressource use or waste per unit of income). How is this referred to the Kuznets curve?
In 1992 the World Development Report “Development and Environment” noted that, “The view that greater economic activity inevitably hurts the envrironment us based on static assumptions about technology, tastes and environmental investments”. In simpler terms they argued that you can have economic activity increasing without hurting the climate.
When looking at the relationship between income and technology we will have to adress the arguments for and against the enviromental Kuznets curve.
The enviromantal Kuznets curve shows the hypothesis realtionship between per capita income and per capita pollutant into the enviroment. As figure 1.2.B show, we see a concave relationship, where an increase in per capita income in the begining will lead to an increase in pollution, but only until a given tipping point. Hereafter an increase in the income decreases polution due to many factors.
Some economists argue from the perspective of the Kuznets curve, that increasing income per capita will lead to a decrease in the pollution per capita due to for example an improvement of technology, which develops green alternative to previous options. Other reasons are structural change towards informationintensive industries and services, coupled with increased environmental awareness, enforcement of environmental regulations and higher environmental expenditures, result in levelling off and gradual decline of environmental degradation.
Other economist argue, that the result from the enviromental Kuznets curve do not hold compared to real life data due simplicity and weak assumptions.
Do the math and graphics for the linear relationship and the Kuznets curve. Explain what happens in them both mathematically and intuitive.
Math and graphics see note 1
Linear relationship:
The linear positive relationship tells us that an increase in income lead to an emission increase as well. With higher levels of emission the enivoremantal degradation increases. This view therefor criticizes the idea of economic activity having a positive impact on the environment. Instead an increase in economic activity would decrease the environment.
The Kuznets curve:
This view argues that the emission of pollutants per unit of output will decrease as per capita income increases after some time.
If the EKC hypothesis is true, it would mean ecnomic activity is not at threat to environmantal degradation. Instead economic activity is the means to environmental improvements. When a country develop economically they would be moving from lower to higher levels per capita income, leading to the overall level of environmental degradation would fall eventually.
Explenation of the graph in depths
“At low levels of development both the quantity and intensity of
environmental degradation is limited to the impacts of subsistence
economic activity on the resource base and to limited quantities of
biodegradable wastes.
”
“As economic development accelerates with the intensification of
agriculture and other resource extraction and the takeoff of
industrialisation, the rates of resource depletion begin to exceed the rates of
resource regeneration, and waste generation increases in quantity and
toxicity.
”
“At higher levels of development, structural change towards information-
intensive industries and services, coupled with increased environmental
awareness, enforcement of environmental regulations, better technology
and higher environmental expenditures, result in levelling off and gradual
decline of environmental degradation.
”
What is the general understanding from studies testing the EKC hypotehsis (Kuznets Curve)? Outline the possible study questions and the results.
There have been many studies econometricaly testing the EKC hypothesis
Two key questions:
1. Are the data generally consistent with the EKC hypothesis?
2. (If the EKC hypothesis holds, does the implication that growth is good for the global environment follow?)
Graphs in note 1
There have been made many econometric papers. Some are supporting the EKC hypthesis for local and regonal impacts, but not for global impacts coming from CO_2. The local and regaonal impacts are from other factors then CO_2, e.g. different chemicals.
In conclusion these papers would argue that the relationship between income and technology in a high income societies would have negative effect on local and regonal enviromental impacts, but not on global scale in the case of CO_2.
We argued that Rawls’s
Difference Principle asserts that it is only just to have an
unequal distribution of wealth if all persons benefit from
that allocation, relative to the situation of an equal
distribution. But we also argued that the total level of utility
attainable might depend on the distribution of wealth, as
utility could be higher in an unequal position if incentive
effects enhance productive efficiency.
Question: Discuss the implications of these comments for a
morally just distribution of resources within and between
countries.
Rawl´s notion of justice imply that i can only be just that we have unequal distribution of resources within and between countries if all induviduals is more wealthy (Pareto improvement) then they would be in the case of equal distribution.
On the other hand we also argued that if the “total level of utility” within and between countries are higher in the case of unequal destribution it would be morally just, but notice that this is not the same as in the Rawlsian case. This is a typical utilitarian stance, where the total level of well being matters, but not its distribution. The theory accept that some people get an extremly high utility and others get a low, if the average is better than in the equal case. Still all people could be better off (Paerto improvement) if the society or government introduce a way of redestributing the wealth.
If we look at the world we could argue that is has taken a utilitarian stance within the countries but not between. In general the worlds country become more equal, but within the country we see greater unequality. Utilitarians will argue this is just, where Rawlsians will argue for it is not just.
What argues Rawls´s Difference Principle? Can you think of another principle for dividing utility most equal?
Rawls’s Difference Principle asserts that it is only just to have an
unequal distribution of wealth if all persons benefit from
that allocation (Pareto allocation), relative to the situation of an equal
distribution.
Utilitarian theory:
But we also argued that the total level of utility
attainable might depend on the distribution of wealth, as
utility could be higher in an unequal position if incentive
effects enhance productive efficiency.
Prove that, under the assumption of diminishing
marginal utility, the linear indifference curves in utility
space in Figure 3.1 map into indifference curves that are
convex from below in commodity space, as illustrated in
Figure 3.2.
We have to consumers A and B
We have shoved that we can go from the linear indifference curve in the utility space to the convex in the commodity space only if we are under the assumption of diminishing
marginal utility.
See the math in Note 1
We end up with
(dX^A / dX^B) / - (U_B / U_A)
This is the slope of the indifference curve in the commodity space, which is negative an equal to their marginal utilities.
Remember both A and B experience diminishing utility returns of consuming more X. There is an initial amount of goods which can be divided. When B then starts to consume more, he will get less marginal utility. His utility gain of consuming one more drops a bit, because he before consumed a bit more. Now A consume less necessarily, which means that her marginal utility increases. The ratio gets smaller and the negative slope of the indifference curve decreases.
Example.
Initial goods = 10 cookies
Marginal utility of eating one extra cookie = What utility you get from eating one extra cookie.
But we have diminishing return to utility = The utility of eating one extra cookie falls from every time you eat one extra. In the beginning you get a lot of utility for eating one extra cookie, but as you eat more and more cookies you start to feel filled up meaning and your utility for eating one extra cookie declines. Meaning your marginal utility declines. At some point you might have get no extra utility of eating one extra cookie.
If we did not had the diminishing return to utility of eating one more, then we would expect the person to be equally happy for every cookie.
Suppose that one believed that each generation should have the same level of well-being as every other one. Demonstrate that we could not ensure the attainment of this merely by the choice of a particular discount rate, zero or otherwise.
Our discount factor
d = 1 / 1+p
where p is the utility discount factor.
We make two examples, with intertemporal maximization problems subject to different secondary conditions (bibetingelser)
- C_0 + C_1 = X
See math Note 1
In this case it is possible to have equal levels of consumption and utility now and in the future if p = 0 why d = 1. Here we are able to ensure the attainment of this merely by the choice of a particular discount rate.
- C_1 = F(C_0), where consumption in period one is a function of consumption in period 0. C_1 is therefore affected by the consumption in the 0 period and the specific form and context of the function F.
See math Note 1
In this case we are not able to ensure the attainment of each generation having the same wellbeing just by the choice of particular discount rate. The best we can do is chasing p = 0, so d = 1 but then we are still dependennt on F_C0, which has be -1 for each generation have the same wellbeing. The implication of p = 0 depend on many things e.g. upon how this play out in real life deepening on how flexible peoples options are for managing their consumption over time.
How does the size of the utility discount rate affect the climate, when we are looking at intertemporal distribution in a utilitarianism view?
In intertemporal distribution, discounting future utility helps address questions like how much we should invest in mitigating climate change today to prevent harm in the future or how to balance consumption now against savings for future consumption. It reflects the trade-offs between present and future welfare.
However, the choice of discount rate has ethical implications, especially in long-term policy considerations such as climate change, where the benefits of actions taken now may not be realized for many years or even generations. A high discount rate could justify less investment in future benefits (e.g., less aggressive climate action), as it makes future benefits seem smaller when converted to present value. Conversely, a low discount rate increases the weight of future benefits and costs, advocating for more substantial immediate sacrifices for the sake of future generations.
How do we understand the discount rate of future utility in general?
The discount rate of future utility is a concept used in economics and finance to adjust the value of future benefits or costs to their present value. It reflects the idea that, due to various reasons such as risk, opportunity cost of capital, inflation, and individual time preference, people generally value a benefit received today more than the same benefit received in the future. The discount rate quantifies this decrease in value over time.
When applied to future utility, the discount rate is used to calculate the present value of future utility gains or losses. This is especially relevant in long-term decision-making processes, such as planning for retirement, evaluating investments, or assessing the costs and benefits of environmental policies that have effects far into the future. The higher the discount rate, the less future utility is valued compared to present utility.
How is the use of p > 0 morally justified by the descriptive and perspective school?
According to the Descriptive school of thought in economics, ρ> 0 is required by the
logic of preference satisfaction which underpins all economics – individuals are observed to prefer current to future consumption, to exhibit positive time preference.
According to the Prescriptive school of thought, there is no ethical basis for policy to reflect individual preferences in this way (cf. Sen on citizens and consumers)– people alive at different dates should have their utilities treated
equally.
This does not imply using ρ = 0. At any point in time there is a small probability that the human species will go extinct. The probability increases with time, implying, given reasonable assumptions, exponentially declining utility weights.
* The Prescriptive approach is taken to mean ρ of the order of 0.001, 0.1%.
* The Descriptive approach is taken to mean ρ of 0.015-0.03, 1.5-3%.
The difference matters a lot– more on this later in the course.
How does ethics have an effect on climate change? Example the Stern Review and the
As compared with most previous economic analyses, the Stern Review (2006) recommended stronger and earlier mitigation action. It was explicit that this was largely driven by its ethical position, as reflected in the values used for the utility discount rate ρ and the elasticity of marginal utility η in the iso-elastic utility
function. Stern’s research considers the utility of future generations.
Stern was criticised by a number of economists for using unreasonably low values
for both ρ and η.
Den usikkerhed har skabt skarpe fronter i den økonomiske verden. Mest kendt er modsætningen mellem to af verdens mest profilerede klimaøkonomer, engelske Nicholas Stern fra London School of Economics, og den amerikanske nobelpristager og udvikler af den klimaøkonomiske DICE-model, William Nordhaus fra Yale University.
Hvor Stern ud fra etisk-filosofiske overvejelser og hensynet til fremtidige generationer bruger en lav rentesats på 1,4 procent, har Nordhaus valgt at en mere markedsbaseret rentesats på 4,5 procent. En på overfladen beskeden forskel, men med enorme konsekvenser:
Can one procent when discounting really have any effect?
Én procent bliver til mange penge over tid
Modellerne strækker sig over flere generationer, og derfor kan en stigning på en enkelt procent i diskonteringsrenten have stor betydning. Men jo højere rentesatsen er, jo højere afkast kræver vi af de investeringer, vi foretager. Derfor giver en høj rentesats også mindre råderum for klimainvesteringer i dag.
”Bruger du Sterns diskonteringsrente, vil vi i dag være rede til at betale 250 kr. for at få et klimaafkast på 1.000 kr. om 100 år. Bruger man Nordhaus’ rente på 4,5 procent, vil vi kun være villige til at betale 10 kr.”
I USA vil en sænkning af diskonteringsrenten fra 3 til 2 procent i sig selv give en næsten tre gange større beregnet værdi af klimatiltag med et 100-årigt perspektiv.
Og endnu mere opsigtsvækkende: Opdaterer man DICE-modellen med nye klimadata og den nye diskonteringsrente giver det faktisk økonomisk mening at holde sig inden for den temperaturstigning på maks. 1,5 til 2 grader, som verdens lande har forpligtet sig til i Paris-aftalen. Det står i skærende kontrast til William Nordhaus’ kontroversielle synspunkt, at 3,5 graders temperaturstigning er økonomisk optimalt.
While some economists argue for the creation of private property rights to protect the environment, many of those concerned for the environment find this approach abhorrent (= causing or deserving strong dislike or hatred). What are the essential issues in this dispute?
Pros:
The establishment of private property rights, where none previously existed, is likely to improve both static and dynamic allocative efficiency of environmental resources.
Owners of the resources can account for the opportunity costs of access, extraction, or harvesting. These costs can be built into the prices paid by resource users. This scenario is more likely to result in a resource use path over time that corresponds to a social optimum than in the absence of property rights.
It may also lead resource allocation closer to a sustainable pattern, although an efficient outcome is not necessarily a sustainable one.
Cons:
However, it is not difficult to find ethical objections to the creation of private property rights.
- In more affluent economies, many individuals argue—largely from ethical premises—that mountain or wilderness areas should be held collectively by a broadly defined community. They believe that future generations have inalienable rights to these resources as well.
In many parts of the world, there are long-established collective or common rights to water, grazing lands, harvestable species, and the like. It is easy to see potential conflicts between maintaining cultural traditions and the goal of economic efficiency.
Not induvidual based property rights, but groups maybe:
Having said this, there is no reason why private property rights need to be individually based. All that is required is that a well-defined set of persons is endowed with property rights, and that this set is sufficiently small so those rights can be enforced at reasonable cost.
