L9 Economic Responses to Environmental Issues

Question 1

Which are the Classical Economics Shools of Thought? Explain them.

Answer 1

1. Adam Smith
2. Thomas Malthus
3. David Ricardo
4. Stuart Mill
5. Karl Marx

Question 2

1. Adam Smith (1776)

Answer 2

The maximization of individual welfare contributes to maximization of social welfare, and the private costs and benefits = social costs and benefits.

The market takes care of an efficient allocation of scarce means, but this theory does not consider the natural resource scarcity as a limiting factor.

Question 3

2. Thomas Malthus (1776 - 1834)

Answer 3

He introduces the concept of “environmental limits” in terms of agricultural land.

There is a fixed amount of land available, which is the absolute scarcity limit. As population grows, this scarce amount of agricultural land reduces the agricultural production.

Therefore, standards of living are forced to descend to subsistence level and the population stops growing.

Question 4

3. David Ricardo (1772 - 1823)

Answer 4

He also claims that economic growth declines in the long run due to scarcity of natural resources.

Not because “absolute scarcity”, but because the lack of good quality land and resources, forcing society to move to poorer soils.
(total production has diminishing returns - p9 pwp)

Technological innovation is absent in the model, therefore it leads to a stationary state (0 growth) in the long run.

Question 5

4. Stuart Mill (1806 - 1873)

Answer 5

Economic progress is a battle between diminishing returns in agriculture and technological change.

Technology delays limits imposed by resource scarcity, then it won’t be necessarily a rapid disaster (further stationary state - p11 pwp)

More optimistic view about technological progress. If there are enough materialistic needs fulfilled, there is more time for education, and more technological progress, etc.

Question 6

5. Karl Marx (1818 - 1883)

Answer 6

Workers are the only source of net economic product.

Environmental damage affects workers health, so better health care requires higher real wages.

Techology, if owned and controlled by the workers, will solve all of society’s ills (it has no natural limit).

Nature is available to be exploited.

Question 7

What is classical economics not taking into account?

Answer 7

• FInancial benefits & Financial costs (Profit)

- External benefits & External costs (Prosperity)

Question 8

Which are the main Neo-classical economists? Explain them.

Answer 8

1. Homo Economicus: value is determined by production costs and preferences.

Human nature is rational and egoistic.
Choices are consistent and efficient (
Individual utility is a function of: goods and services traded in market, unpriced environmental externalities, and worries for future generations

Market failures may exist that prevent optimal resource allocation.

2. Resource economists