Macroeconomics - L20 Environmental Policy

Question 1

Is Environmental Policy an Aggregate Supply policy or an Aggregate Demand policy?

Answer 1

Aggregate Supply

Question 2

What are AS policies designed to do?

Answer 2

Increase the nation’s productive capacity, permitting an increased volume of goods and services to be produced over time.

Question 3

What is productive capacity?

Answer 3

The point at which production (or GDP) is occurring at the maximum level possible in an economy.

Question 4

What does environmental policy refer to?

Answer 4

Any government policy that is designed to protect Australia’s physical or natural environment from damage or depletion.

Question 5

Provide two reasons as to why the environment is important to the economy.

Answer 5

1. The environment needs to be protected so that the economy can continue to function long into the future.
2. The environment offers us our natural resources. If we extend the longevity of the environment we can increase the availability of these resources, therefore boosting aggregate supply/productive capacity and economic prosperity.

Question 6

Provide 2 costs of climate change to the economy.

Answer 6

1. Extreme weather events causing destruction of land and infrastructure.
2. Increases in the cost of insurance due to extreme weather events causing damage to property.
3. Negative impact on the tourism industry due to events like floods and coral bleaching.
4. Decrease in living standards including material and non-material.

Question 7

How could climate change cause a decrease in productive capacity?

Answer 7

Extreme weather events that occur because of climate change such as cyclones, floods and droughts are likely to result in damage to essential infrastructure such as roads, rail and ports along with damage to agricultural land which will reduce the potential output of the economy (i.e. real GDP) over time.

Question 8

Explain how climate change is a negative externality.

Answer 8

Climate change is a negative externality in production that imposes a cost onto third parties not involved in the transaction. Eg. Increase carbon emissions resulting from the production process contribute to climate change which has serious consequences for humans such as shrinking water supplies, severe weather events and changes to food supply.

Question 9

What is the Paris Agreement?

Answer 9

The Paris Agreement is a climate agreement with the goal of preventing the global average temperature from rising 2°C above pre-industrial levels and pursuing efforts to keep it below 1.5°C.

It also aims to reach global net-zero emissions, where the amount of greenhouse gases emitted, equals the amount removed from the atmosphere in the second half of the century. (This is also known as being climate neutral or carbon neutral.)

Question 10

Australia is a signatory to the Paris Agreement. How can this environmental policy positively influence AS?

Answer 10

The Paris Agreement is an environmental policy that is supported by domestic legislation.

Keeping the global temperature from rising to unsustainable levels will minimise extreme weather events which cause damage to infrastructure, destroy agricultural land and crops and decrease tourism.

This will enable producers to increase output and aggregate supply without constraints and increased costs caused by climate change.