ECN220 Chapter 13: Global Economy and Environment

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Questions and Answers

What does point A on the diagram indicate concerning the environmental damage in the Foreign Country?

It shows that the marginal cost of pollution is lower than the benefit.

It signifies that no additional pollution is acceptable beyond this point.

It suggests that dumping waste helps improve the river's condition.

It illustrates that damage increases disproportionately along the marginal cost curve. (correct)

How would a pollution tax affect the behavior of the Home Country in relation to dumping waste?

It would have no impact on the amount of waste dumped since costs are externalized.

It would encourage more waste dumping to profit from tax breaks.

It would marginally increase dumping due to tax incentives.

It would likely decrease the amount of waste dumped to reduce tax liabilities. (correct)

What is a possible result of poor property rights in relation to pollution mentioned in the context?

Improved relations between countries regarding waste management.

Suboptimal allocation of resources leading to excessive dumping. (correct)

Greater accountability for industrial polluters.

Increased investment in environmental technology.

How could domestic firms be affected by increased regulations on transborder pollution?

Regulations may encourage innovation leading to cleaner production processes. Signup and view all the answers

What is implied about pollution exceeding 80 million tons in the context?

It results in greater harm than the benefit gained from dumping. Signup and view all the answers

What contributes to the perception of unfair competition by domestic firms regarding imports?

Absence of environmental regulations in other countries Signup and view all the answers

Which factor can justify the disparity in foreign pollution policies compared to the importing country?

More lenient pollution regulations due to economic priorities Signup and view all the answers

How might a foreign country offset the effects of lenient pollution regulations?

By utilizing abundant natural resources Signup and view all the answers

What potential benefit exists from enforcing stricter pollution regulations on foreign imports?

Improved global environmental standards Signup and view all the answers

What problem arises when pollutants from one country affect neighboring nations?

Challenges in regulating transborder pollution Signup and view all the answers

What is a potential drawback of the home country benefiting from dumping waste in a foreign country?

Marginal costs of waste dumping affecting foreign services Signup and view all the answers

What is a key aspect of property rights and pollution management?

Defining ownership of natural resources and their use Signup and view all the answers

How does competition from foreign firms affect domestic firms with stricter environmental regulations?

It often results in a competitive disadvantage Signup and view all the answers

What are marginal external costs (MEC) in the context of production?

Costs associated with pollution that affect other parties not involved in the transaction. Signup and view all the answers

How can a country mitigate the economic distortion caused by pollution?

By enacting policies that require polluters to internalize external costs. Signup and view all the answers

What is one potential consequence of unregulated domestic pollution for international trade?

Diminished overall well-being of a country despite increased trade. Signup and view all the answers

What role do pollution taxes play in environmental policy?

They help in internalizing the external costs of pollution. Signup and view all the answers

Establishing property rights in natural resources primarily aims to:

Ensure that polluting firms compensate resource owners for their usage. Signup and view all the answers

How do pollution permits impact domestic firms?

They raise production costs, leading to reduced competitiveness. Signup and view all the answers

What is a possible effect of free trade regarding unresolved pollution issues?

It can result in exporting goods that are less beneficial to the domestic economy. Signup and view all the answers

What happens to the competitiveness of domestic firms when they face pollution control costs?

Their competitiveness diminishes because of higher production expenses. Signup and view all the answers

Study Notes

Course Information

Course Title: ECN220 Evolution of the Global Economy
University: Toronto Metropolitan University
Instructor: Dr. Hakan Toksoy
Year: 2024

Chapter 13 Objectives

Global Economy and Environment

Is Free Trade Anti-Environment?

International trade can worsen environmental issues
Trade restrictions can increase pollution, for example, U.S. limits on Japanese cars in the 1980s led to more fuel-inefficient vehicles
Protective agricultural policies often lead to excessive pesticide and fertilizer use, harming the environment
Free trade can encourage global adoption of sustainable practices, potentially reducing environmental damage, through increased production movement to countries with weaker environmental standards
Resulting in “pollution havens” and increased global pollution
Environmental compliance costs are generally low

The Environmental Impact of Freer Trade (the Uruguay Round)

Freer trade shifts production and consumption patterns, impacting pollution
Trade involves two opposing environmental effects
- Increased production may raise pollution
- Higher incomes could raise demand for stricter environmental standards, encouraging cleaner practices
The net effect on environmental quality depends on which factor has greater influence (economic growth or demand for sustainability)
Overall environmental impacts of the Uruguay Round are minimal
Economic benefits of freer trade significantly outweigh any environmental costs

Environmental Harm with Rising Income per Person

Environmental harm declines with rising incomes
- Demand for better environmental quality surpasses the negative effects of increased production, improving environmental conditions
Environmental harm rises with rising income
- Environmental damage costs are overlooked resulting in higher damage as income grows
Inverted U-shaped relationship
- Environmental harm initially rises with income as low-income populations accept damage for economic growth
- As incomes increase, demand for environmental protection strengthens, prompting stricter regulations and reducing harm, even with continued production growth

Environmental Harm with Rising Income per Person (Composition Effects)

Freer trade influences pollution levels differently across regions
- In developed countries (U.S., EU, and Japan), freer trade generally increases pollution due to growth in capital- and skill-intensive industries like steel, chemicals, and petroleum
- In developing countries, pollution tends to decrease as less-skilled labor-intensive industries, like textiles and apparel grow
Heckscher-Ohlin model predicts trade shifts pollution-heavy industries to developed nations while reducing them in low-income countries

The Environmental Impact of Freer Trade (the Uruguay Round) - Developed and developing Countries

Pollution from sulfur dioxide, suspended particulates, and carbon monoxide tends to decline in developed countries
Nitrogen dioxide levels are rising, in the EU and Japan, as income levels have not yet reached a turning point
Pollution in developing countries is increasing due to income levels not yet reaching turning points for pollutants
Overall, environmental impacts of the Uruguay Round are minimal, with economic benefits significantly outweighing associated costs

Is the WTO Anti-Environment?

WTO rules restrict governments from enforcing robust protections
Governments can implement measures to reduce environmental harm without breaching WTO regulations
WTO, like its predecessor GATT, aims to liberalize trade but recognizes environmental issues
Article XX provides exceptions in the free-trade framework, allowing for trade barriers when justified by environmental concerns

Environmental Exceptions under WTO Rules

WTO permits countries to establish product standards for health, safety, and environmental reasons, even if these lead to reduced domestic and imported products
WTO prohibits countries from using environmental standards as disguised protectionism
WTO permits countries to restrict imports of products made using environmentally harmful methods, but only under strict conditions

Special Policies on Trade and Environment

Externality arises when an activity imposes costs or confers benefits on unrelated individuals
Pollution, viewed as external cost
To address environmental impacts like pollution, special policies are necessary to manage externalities
Externalities create distortions in the market, causing a gap between private and social costs/benefits
Without government intervention, competitive markets may result in either excessive or insufficient activity levels

Special Policies on Trade and Environment (Pollution Taxes and Subsidies)

Government can impose taxes on individuals and businesses to account for external costs—like pollution—imposed on others.
Subsidies can reward behaviors that generate external benefits
By assigning ownership of resources (including the right to pollute), market forces can determine resource use
Owners decide if to pollute based on others' willingness to pay to avoid the pollution, creating a market for resources that previously caused externalities
Policies should directly target the externality to impact the behavior

Government Policies on Trade and Environment (Taxes and Subsidies Examples)

Policies vary depending on whether the harm is from production in the home nation or a foreign nation, and if the harm is from pollution of resources or consumption

Trade and Domestic Pollution

Unregulated domestic pollution can lead to two consequences in international trade
- Free trade might diminish a country's well-being due to unresolved pollution issues
- The country may find itself exporting products that should be imported
Pollution imposes external costs on others, like damaging ecosystems
Actual social costs of production are underestimated if external costs are overlooked

Trade and Domestic Pollution (Policy Solutions)

Policies reducing pollution distortion:
- Implement pollution taxes
- Establish property rights, granting individuals ownership of natural resources (like water)
  - Polluting firms compensate for the right to pollute
- Government create a limited number of pollution permits for firms
Solutions raise production expenses and reduce output, making firms less competitive
Confronting imports priced lower due to lack of similar pollution regulations viewed as unfair competition

Trade and Domestic Pollution (Foreign Country Justification)

Foreign country may have more lenient regulations:
- lower pollution
- less impact on environment
- Citizens prioritize economic growth over environmental protection
- Possess abundant natural resources that can absorb pollution

Transborder Pollution

Pollution impact is significant when both countries share the same resources (like a river)
Significant challenges for governments because harmful effects extend beyond the country where they originate
Policies affecting pollution need global agreements

Transborder Pollution (Policy Recommendations)

To achieve balance—considering the optimal amount of pollution, the Home country needs to be aware of costs from pollution
The best policy might be to implement a pollution tax
Global approaches to balancing externality are complex, needing authority to regulate

Next Best Solution to Transboundary Pollution

If international negotiations fail, the Foreign Country can implement its own independent policies
- Restricting imports of goods from the home country, particularly from the polluting firm
If the Foreign Country exports paper to the home country, it can subsidize those exports to reduce home production and pollution

NAFTA, the USMCA, and the Environment

Environmental challenges along the Mexico-U.S. border highlight complexities in managing transborder pollution
Despite environmental laws, enforcement is often weak in Mexico due to limited resources and economic priorities
Pollution from Mexican industries has caused damage on both sides of the border
NAFTA's side agreement established a commission and the North American Development Bank to support cleanup efforts resulting from environmental issues
In 2020 NAFTA was replaced by the U.S.-Mexico-Canada Agreement (USMCA), which strengthened environmental regulations

Global Environmental Challenges

Transborder pollution becomes more complex when global economic activities create external costs affecting the entire world
Two global environmental challenges are depletion of ozone layer and global warming caused by greenhouse gas emissions
Other challenges are species extinction and depletion of common resources

Extinction of Species

Human activities (habitat destruction, pollution, and overhunting) have led to species extinction
Initiatives like protected parks and sustainable management are effective in preventing extinction, but comprehensive international agreements are lacking
The 1973 Convention on International Trade in Endangered Species (CITES) aims to prevent international trade endangering species (with approximately 1,100 endangered species commercially banned since 2020)

Overfishing

The world's oceans and marine life are crucial global resources
Overfishing is a concern since 1990, with over a third of fish stocks reportedly overfished
Most fish species are not threatened with extinction, but their populations are declining due to unsustainable fishing practices—overfishing
This issue illustrates the “tragedy of the commons” where unrestricted access leads to overexploitation without regard for sustainability

CFCs and Ozone

Chlorofluorocarbons (CFCs) widely adopted in industries
Early 1970s research revealed that CFCs deplete the ozone layer, posing risks like skin cancer, reduced agricultural yields, and potential climatic changes
Observable ozone holes were identified over the poles by 1985
Over 50 nations signed the Montreal Protocol in 1987 to ban the production and trade of CFCs and halons - Number of signatories increased to 198 countries by 2022;
The protocol implemented bans and production limits due to significant negative social costs tied to CFC emissions

CFCs and Ozone (Factors Contributing to Success)

Clear scientific evidence linking CFCs to ozone depletion
A limited number of products involved; viable substitutes were available at minimum cost
Concentration of CFC production among a few countries and firms facilitated agreement and enforcement
Countries most affected by ozone depletion were also the primary producers and consumers of CFCs, creating a strong incentive for compliance

Greenhouse Gases and Global Warming

Human activities increase carbon dioxide (CO2) and other greenhouse gases in the atmosphere, leading to global warming
Unlike the successful Montreal Protocol, reducing greenhouse gases is more challenging
Scientific understanding of the greenhouse effect is less definitive but increased CO2 concentrations are evident, primarily due to human activities like fossil fuel consumption
International trade is not the root cause or a viable solution to this problem

Greenhouse Gases and Global Warming (Policy Changes)

Removing fossil fuel subsidies could reduce emissions but will not significantly reduce CO2 buildup
Afforestation can absorb CO2 but would eventually lose effectiveness after forest maturity—only buys time for larger emission reductions
Relying on fossil fuel depletion is not a viable solution since Earth has abundant supplies
International trade policy alone cannot effectively reduce greenhouse gas emissions

Greenhouse Gases and Global Warming (Kyoto Protocol & Paris Agreement)

Kyoto Protocol, established in 1997, aimed to reduce greenhouse gases in developed countries, but it had limited impact due to various challenges
- Many countries failed to meet targets
- U.S. opted out
- Emissions from developing nations increased significantly (especially China)
Paris Agreement, signed in 2015, aimed to limit global temperature rise to below 2°C (preferably 1.5°C), with nearly all countries committing, but commitments are voluntary and lack enforcement mechanisms
Nations are required to report progress every 5 years and establish new targets, with 2021 pledges remaining inadequate

Additional Notes

Data and graphs are included in the source material, relating to the various topics. These graphs are not included in this summary but would be part of any full study notes.

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Explore the complex interplay between free trade and environmental issues in this quiz. Chapter 13 focuses on how international trade can both negatively and positively affect the environment, examining historical examples and the implications of trade policies. Test your understanding of globalization and sustainable practices.