Enviro Econ Study PDF

What is Sustainability? ​ Sustainability as Survival ○​ At its core, sustainability is about long-term survival. ○​ Example: Dinosaur extinction due to asteroid impact. ​ 160 km asteroid Baptistina shattered 160 million years ago. ​ Led to Chicxulub...

What is Sustainability? ​ Sustainability as Survival ○​ At its core, sustainability is about long-term survival. ○​ Example: Dinosaur extinction due to asteroid impact. ​ 160 km asteroid Baptistina shattered 160 million years ago. ​ Led to Chicxulub crater formation 65 million years ago. ○​ Future risk: Asteroid Apophis—identified in 2004, expected to pass close in 2029. Theodore Roosevelt on Sustainability (1907) ​ Natural resources should be: ○​ Conserved and treated as assets. ○​ Handed over to future generations in an improved state. Visions of the Future ​ Has Economic Growth Slowed?​ ○​ Historically, economic growth was slow and inconsistent. ○​ Industrial revolution led to rapid acceleration. ○​ Post-WWII growth peaked at 3% per year but declined: ​ 1970s: Dropped to 2% per year. ​ 2000s: Fell below 1% per year. ○​ Innovation is key to sustained growth—not just more workers or investment. Economic Sustainability ​ Definition (Robert Solow) ○​ Sustainability means maintaining a given standard of living (GDP per capita) over time. ○​ Assumes physical & human capital can compensate for natural capital loss.  ○​ Criticism: Can everything truly be replaced? ​ Norway Example: Uses oil profits for a pension fund. ​ Nauru Example: Phosphate mining destroyed 80% of the island, leading to economic collapse. Problems with GDP as a Measure of Well-being ​ GDP Definition​ ○​ Measures market-based economic activity. ○​ Often mistaken for a measure of well-being. ​ Issues with GDP​ ○​Fails to include non-market production (e.g., housework). ○​Ignores costs of economic growth. ○​Does not account for capital depreciation (natural & human). ○​Represents the "average" person, not the typical experience. ○​Overlooks: ​ Leisure time. ​ Black-market economy. ​ Work at home. ​ Inequality. ​ Public goods and externalities. ​ Case Study: U.S. Healthcare vs. Europe​ ○​ U.S. spends more per capita on healthcare. ○​ Outcomes worse than in Europe despite higher spending. ○​ Key Question: Does this mean inefficiency or other societal factors? ​ Joseph Stiglitz on GDP & Inequality​ ○​ GDP has risen almost every year since 1991. ○​ But real wages have declined for many Americans. ○​ Benefits of economic growth go mostly to the top earners. Alternative Sustainability Metrics ​ Sustainability Dashboard​ ○​ Needs multiple indicators to track economic, social, and environmental factors.  ​ Human Development Index (HDI)​ ○​ Measures health, education, and income. ○​ Criticism: Implies controversial value judgments. ​ Example: A year of life expectancy in the U.S. is valued 20x more than in India. ​ Inclusive Wealth Index (IWI)​ ○​ Measures: ​ Produced capital (e.g., infrastructure). ​ Human capital (e.g., education). ​ Natural capital (e.g., forests, minerals). ○​ Findings: Economic growth often masks declining wealth. Happiness & Sustainability ​ Happiness Rankings​ ○​ Based on Gallup World Poll (2021-2022). ○​ Factors include: ​ Social support. ​ Life expectancy. ​ Economic freedom. ​ Perceptions of corruption. ​ Democracy & Happiness​ ○​ Correlation between higher democracy levels and happiness. Final Takeaways ​ GDP is not enough to measure well-being. ​ Sustainability requires multiple indicators (economic, environmental, and social). ​ Economic policies must balance growth with long-term well-being. ​ Innovation, equity, and environmental responsibility are key to sustainable progress. The Capitalist Revolution How Capitalism Revolutionized the Way We Live and How Economics Attempts to Understand It A. Introduction ​ Historically, most nations were poor. ​ Rapid, sustained economic growth began around 1700. ​ Key question: How did this happen? ​ Data Sources: ○​ David Maddison’s research on historical GDP growth. ○​ Median vs. mean income comparisons (Our World in Data). The Global Economy: How Did We Get Here? ​ Key Drivers of Economic Change: ○​ Economic inequality and divergence. ○​ Technological revolution and economic growth. ○​ Role of capitalism in economic development. ○​ Government's role in shaping capitalism. Path Dependence: How History Shapes Economic Systems ​ Past decisions influence present choices. ​ Examples: ○​ Railway gauge standardization (143.5 cm) due to historical adoption by George Stephenson. ○​ More efficient track gauges exist, but conversion costs make change difficult. Sunken Assets in Fossil Fuels ​ 2015 study in Nature: 80% of fossil fuel reserves must remain unextracted to prevent runaway climate change. ​ Challenge: Fossil fuel industry valued at $20 trillion. ​ Historical Comparison: ○​ Southern U.S. slave economy in 1860. ○​ Slaves accounted for 16% of total household wealth (~$10 trillion in today’s terms). ○​ Abolishing slavery = massive wealth destruction. ○​ Likewise, transitioning from fossil fuels poses economic and political challenges. B. Inequality How Unequal Is the World? ​ Income disparities between countries are extreme. ○​ Example: Singapore’s richest 10% earn $67,436/year, poorest earn $3,652/year. ○​ Liberia’s richest earn $994/year, poorest earn $17/year. ​ Global Wealth Distribution (2017, Credit Suisse) ○​ Top 1% control 50% of global wealth. ○​ Thomas Piketty: Inequality is a feature of capitalism and needs state intervention to be controlled. Income Growth in the U.S. Since 1980 ​ Growth has been uneven—top earners gained far more than middle and lower classes. ​ Wealth gaps persist along racial lines (white families typically wealthier). Within and Between-Country Inequality ​ 1,000 years ago, incomes were relatively equal worldwide. ​ Modern inequality is much larger between nations. ​ The "hockey-stick" growth pattern shows how some countries took off economically while others stagnated. Why Inequality Matters for Natural Resources ​ Mineral wealth is concentrated. ​ Low-income countries struggle with conservation—poverty often leads to resource exploitation. ​ Wealthy individuals may not prioritize sustainability. ​ Social unrest can damage environmental efforts. ○​ Example: Marikana mine strike (South Africa, 2012)—miners shot while protesting for higher wages. Measuring Inequality ​ Lorenz Curve: Visualizes income inequality. ​ Gini Coefficient: Ranges from 0 (perfect equality) to 1 (maximum inequality).  ​ Case Study: Pirate ships had more equal pay structures than the British Navy. Addressing Inequality ​ Redistributive government policies (taxes, transfers). ​ Land reform example: Operation Barga (West Bengal, India) ○​ Increased sharecropper rights, reduced poverty, and improved productivity. C. “Hockey-Stick” Growth GDP Growth by Nation ​ Economic growth was slow until 1700, then surged ("hockey-stick" pattern). ​ Growth take-off occurred at different times in different countries: ○​ Britain: First sustained growth (~1650). ○​ Japan: Around 1870. ○​ China & India: Late 20th century. The Technological Revolution ​ Technology reduces resource use per output unit. ​ Example: Light production efficiency is 500,000x greater today than in ancient times. ​ Industrial Revolution (18th century Britain): Shifted from agrarian to industrial economy. Environmental Consequences of Economic Growth ​ Global issues: Climate change. ​ Local issues: Pollution, deforestation. ​ Technology may offer solutions by improving efficiency. D. Capitalism What is Capitalism? ​ Key institutions:  ○​ Private property: Ownership of capital and resources. ○​ Markets: Voluntary exchange of goods/services. ○​ Firms: Business entities that use inputs to produce outputs for profit. How Capitalism Drives Growth ​ Technology advancement: ○​ Firms compete by innovating. ​ Specialization: ○​ Market expansion allows workers to focus on specific tasks, increasing efficiency. Comparative Advantage & Trade ​ Trade enables specialization, even when one country is less efficient overall. ​ Example: A country with higher productivity in all areas can still benefit by specializing in its strongest area. Did Capitalism Cause "Hockey-Stick" Growth? ​ Natural experiment: Germany post-WWII ○​ West Germany (capitalist) grew much faster than East Germany (centrally planned economy). Political Systems & Capitalism ​ Capitalism coexists with different political systems: ○​ Democracy: Fair elections, individual rights. ○​ Authoritarianism: Less political freedom, but still market-based economies. ​ Government role varies: Infrastructure, education, regulations. E. Economics: Understanding Human Behavior ​ Key Economic Questions:​ ○​ How do we acquire necessities? ○​ How do we interact (as buyers, workers, citizens)? ○​ How do we impact the environment? ○​ How does all of this change over time?  ​ Economics studies these interactions.​ ​ The economy exists within society, which exists within the biosphere.​ Summary & Key Takeaways Major Economic Trends 1.​ Income inequality has increased over time. 2.​ "Hockey-stick" growth in GDP changed global living standards. 3.​ Technological progress and capitalism were key factors. 4.​ Capitalism = Private Property + Markets + Firms. 5.​ Government & political systems shape capitalist outcomes. Challenges for the Future ​ Sustainability vs. economic growth. ​ Inequality’s impact on political and economic stability. ​ The role of technological innovation in solving resource constraints. Technological Change, Population, and Growth How Technology Transformed Economic Growth and Why Some Societies Stagnated A. Introduction The Context ​ Historically, most societies remained poor for thousands of years. ​ Rapid, sustained economic growth only began 200 years ago. ​ Key questions: ○​ Why did the technological revolution start? ○​ Why didn’t it start earlier? ​ Economic models help explain: ○​ Growth in real wages & population in the last two centuries. ○​ Economic stagnation before industrialization. B. Economic Models Why Do We Need Models? ​ Economies involve millions of interactions—models help us simplify and understand them. ​ Good models focus on essential features while ignoring unnecessary details. Characteristics of a Good Model 1.​ Clarity – Helps understand important concepts. 2.​ Predictive power – Accurately aligns with real-world evidence. 3.​ Improves communication – Identifies points of agreement/disagreement. 4.​ Useful – Helps improve economic decision-making. Key Concepts in Economic Models ​ Ceteris Paribus – "Holding other factors constant" for analysis. ​ Incentives – Rewards or punishments influencing choices.  ​ Relative Prices – Help compare economic alternatives. ​ Economic Rent – The extra benefit from a choice relative to the next best alternative. C. Explaining Growth Why Did the Industrial Revolution Start in Britain? ​ Factors contributing to Britain’s early industrialization: ○​ High labor costs and cheap energy (coal). ○​ Scientific revolution & Enlightenment ideas. ○​ Political stability and institutions fostering innovation. ○​ Cultural traits emphasizing hard work & savings. ○​ Colonial resources fueling industrial expansion. Technology as a Driver of Growth ​ Technology = Process that uses inputs to produce an output. ​ Example: Cloth Production ○​ Firms could use different combinations of labor & coal to produce 100 meters of cloth. ○​ Labor-intensive vs. energy-intensive technologies. ○​ Rational firms adopt the least-cost technology based on relative prices. Innovation and Profit Maximization ​ Firms minimize costs by choosing optimal technologies. ​ Relative Prices Matter: ○​ Before the Industrial Revolution: Labor was cheap, so firms used labor-intensive methods. ○​ As wages increased, firms had incentives to adopt capital-intensive methods (machines). ​ Innovation Rent = Profit gained from adopting a new technology. Creative Destruction ​ Entrepreneurs adopt new technologies and disrupt traditional industries. ​ Schumpeter’s Theory (Joseph Schumpeter) ○​ Economic growth is an evolutionary process. ○​ New sectors replace old ones.  ○​ Workers and firms must adapt, or they risk obsolescence. ​ Luddite Movement (Early 1800s) ○​ Skilled artisans resisted mechanization. ○​ Today’s parallels: Fears about AI, automation, and genetic engineering. Diverging Economic Fortunes Case Study: North vs. South Korea ​ 1950-1970s: GDP per capita was similar in both Koreas. ​ South Korea: ○​ Implemented market reforms, invested in education & infrastructure. ○​ Now has a high-income economy (comparable to Portugal & Spain). ​ North Korea: ○​ Maintained a centrally planned economy. ○​ Living standards are now 10x lower than in South Korea. ○​ Average life expectancy is 10 years shorter. D. Explaining Stagnation Why Did Economies Stagnate Before the Industrial Revolution? ​ Need a different model to explain economic stagnation before the 18th century. Population Growth and Technology ​ Population grows exponentially, but food production grows arithmetically. ​ Example: Exponential Doubling (Jeff Bezos Thought Experiment) ○​ 1 penny doubled monthly → $176 billion in 44 months. ○​ Illustrates how population growth can rapidly outstrip resources. The Law of Diminishing Returns ​ Adding more workers to fixed land reduces productivity per worker. ​ More workers → Less output per person → Lower wages. Malthus’ Model (1798) ​ Thomas Malthus predicted that population growth cancels out economic gains. ​ Key Ideas: ○​ Higher wages → More births → Larger population. ○​ More workers → Lower wages. ○​ Equilibrium forces wages back to subsistence level (bare survival). ○​ Long-run stagnation: Population and income remain constant. Food vs. Population Growth ​ Population growth is exponential (self-reinforcing). ​ Food production is arithmetic (each increase adds a fixed amount). ​ Result: Population outstrips food supply unless checked by disease, war, or famine. Was Malthus Right? ​ Evidence from England (1280-1600) supports the Malthusian model. ​ However, industrialization broke the cycle. Escaping the Malthusian Trap ​ Three conditions needed for stagnation: ○​ Diminishing returns to labor. ○​ Population growth responding to higher wages. ○​ No technological improvements. ​ Industrialization broke the third condition. ○​ Permanent technological progress led to continuous economic growth. E. Summary & Key Takeaways Major Economic Lessons 1.​ Economic models help explain both growth and stagnation. 2.​ Industrial Revolution was driven by technology and incentives. 3.​ High wages + cheap energy = Incentive for mechanization. 4.​ Creative destruction forces firms to adapt or fail. 5.​ Malthusian stagnation persisted for centuries—until technological progress accelerated. The Future of Technological Change ​ Are all technological advances good? ​ Concerns about AI, automation, and ethics. ​ How do we ensure technology benefits society as a whole? Producer Behavior Quote: “Without theory facts are silent.” – Friedrich August von Hayek Introduction ​ Economic activity involves both consumption and production. ​ Production: The process of converting inputs into outputs. ○​ Inputs: Labor, capital equipment, natural resources, intermediate goods. ○​ Outputs: Finished products, services, or intermediate goods. Fragile Supply Chains in 2021 Challenges in Restarting the Economy Post-Pandemic  ​ Economic recovery is not a simple process. ​ Businesses must reopen, laid-off workers must find new jobs, and manufacturers must restart production lines. ​ Record low inventory-to-sales ratios in March 2021. Transport: The Weak Link in the Supply Chain ​ Shipping container shortages led to skyrocketing shipping rates. ​ Congestion at international ports impacted railroads and trucking. ​ Automobile sales suffered due to supply chain disruptions. Market Fundamentals Definition of a Market ​ Institution or mechanism for voluntary exchange of goods & services. ​ Characteristics of competitive markets: ○​ Many buyers & sellers. ○​ Homogeneous products. ○​ Free entry & exit. ​ Historical Note: The term “banyan” (from banyan trees in India) originally meant "market." Supply and Producer Behavior Definition of Supply ​ Supply: The amount of a good sellers are willing & able to sell at various prices. ​ Law of Supply: ○​ Price rises → Quantity supplied rises ○​ Price falls → Quantity supplied falls Supply Schedule & Curve ​ Supply Schedule: Table showing price vs. quantity supplied. ​ Supply Curve: Graphical representation of supply behavior. ​ Changes in price lead to changes in quantity supplied. Factors Affecting Supply 1.​ Resource prices 2.​ Technology advancements 3.​ Future expectations 4.​ Number of sellers in the market Shifts in Supply ​ Decrease in Supply → Supply curve shifts left. ​ Increase in Supply → Supply curve shifts right. Market Interactions: Supply and Demand Market Equilibrium ​ The point where supply = demand (Q* at price P*). ​ Any shifts in supply or demand will affect market equilibrium. Market Surpluses & Shortages ​ Surplus: Excess supply at high prices. ​ Shortage: Excess demand at low prices. Shifts in Demand & Supply ​ Decrease in Demand → Lower equilibrium price & quantity. ​ Increase in Demand → Higher equilibrium price & quantity. ​ Decrease in Supply → Higher price, lower quantity. ​ Increase in Supply → Lower price, higher quantity. Market Entry and Competition ​ Market entry occurs when firms see economic profits. ​ Supply increases with market entry, shifting the supply curve. ​ Market exit occurs if costs are too high, shifting supply left. The Role of Taxes Impact of Taxes on Market Behavior ​ Taxes on suppliers or consumers shift supply/demand curves. ​ Types of economic impacts: ○​ Consumer surplus decreases. ○​ Producer surplus decreases. ○​ Government revenue increases. ○​ Deadweight loss (efficiency loss) occurs. Tax Incidence & Elasticity ​ Who bears the tax burden? ○​ More elastic demand → Producers bear more of the tax. ○​ More elastic supply → Consumers bear more of the tax. ​ Example: Denmark’s Butter Tax ○​ 15-20% reduction in butter consumption. ○​ Eventually repealed due to administrative burden. Consumer vs. Producer Surplus Uber’s Consumer Surplus (CS) Example ​ Uber uses surge pricing to estimate willingness to pay. ​ 2015 UberX consumer surplus: $6.8 billion in the U.S.. ​ For every $1 spent by consumers, $1.60 of CS was generated. ​ Based on research from NBER (2016). Producer Surplus ​ Definition: Difference between price received and cost of production. ​ Graphical representation of Consumer & Producer Surplus. Elasticity of Supply and Demand Price Elasticity of Demand ​ Measures how much quantity demanded changes with price. ​ Formula: % Change in Quantity Demanded ÷ % Change in Price. ​ Factors affecting elasticity: ○​ Availability of substitutes. ○​ Time to respond to price changes. ○​ Share of income spent on the good. ○​ Temporary vs. permanent price changes. Example: Gasoline Prices ​ Price increased 55% (2004-2005) → Consumption fell only 3.5%. ​ Price increased 53% (1998-2004) → Consumption actually rose by 10%. ​ Why? Economic growth and lower car prices offset price increases. Supply and Demand in Real Markets How Price Changes Affect Consumption ​ Gasoline price elasticity is approximately -0.7: ○​ 10% increase in price → 7% decrease in demand. ○​ 4% reduction comes from fuel-efficient cars. ○​ 3% reduction comes from less driving. Case Study: Supply & Demand in the Real World Hula Hoop Demand in 1958 ​ Wham-O marketed the Hula Hoop → Sales skyrocketed to 100M in one year. ​ 1994 film "The Hudsucker Proxy" depicted market dynamics. ​ Discussion prompt: How did supply & demand affect pricing? Final Thoughts: The Importance of Producer Behavior ​ Changing incentives affect market outcomes. ​ Understanding producer behavior helps address scarcity. ​ Economic choices impact environmental quality. ​ Better economic & environmental outcomes require behavioral adjustments. Test Your Knowledge ​ Example question: ○​ Suppose demand for nickel is Q_D = 1.2 – 0.6P and supply is Q_S = 0.3P. ○​ Find equilibrium price & quantity. ○​ Calculate consumer & producer surplus. Conclusion ​ Producers play a crucial role in markets. ​ Understanding supply, demand, taxes, and elasticities helps explain real-world economic behaviors. ​ Consumer and producer choices shape the economy & environment. Is Growth Sustainable? Introduction ​ Key Question: Is exponential growth sustainable? ​ Greta Thunberg’s Speech (UN, 2019): ○​ Criticizes focus on economic growth over environmental sustainability. ○​ Highlights suffering, ecosystem collapse, and mass extinction concerns. Overview ​ Themes Explored: 1.​ Market economies and sustainability. 2.​ Sustainable growth considerations. ​ Overpopulation? ​ Do richer nations pollute less? 3.​ Economic perspectives on sustainability. Market Economies and Sustainability ​ Markets as Self-Correcting Systems:​ ○​ Adam Smith’s division of labor. ○​ Resources allocated based on value and scarcity. ○​ Prices should reflect opportunity costs to manage resource use. ​ Simon-Ehrlich Wager:​ ○​ Debate on whether natural resource scarcity is reflected in market prices. ○​ Comparison of metal prices over time to determine sustainability. Water Scarcity & Sustainability Challenges  ​ Pricing Water Appropriately: ○​ Climate change affecting food security and social stability. ○​ Hydropower projects (Turkey, China) reducing water availability for neighboring nations. Overpopulation and Sustainability ​ Historical Perspectives:​ ○​ Thomas Malthus: Predicted scarcity due to land limitations. ○​ J.S. Mill: Argued technological advancements could counter scarcity. ​ Technological Influence:​ ○​ Industrial Revolution: A historical anomaly or the new norm? ○​ Norman Borlaug: Green Revolution advocate; argued technology prevents starvation. ​ Demographic Transition Theory:​ ○​ Correlation between economic development and declining birth rates. ○​ Statistical analysis of how income affects fertility: ​ Poor nations have higher birth rates. ​ Regression analysis shows income elasticity of fertility at -0.31. ​ Impact of Age Structure on GDP:​ ○​ Higher working-age population correlates with higher GDP. ○​ Youthful populations negatively impact economic productivity. Pollution and Economic Growth ​ Most Polluted Cities (2020):​ ○​ 15 of the 20 most polluted cities are in India. ○​ Pollution leads to 7 million premature deaths annually. ​ Urbanization & Pollution:​ ○​ Larger cities are not necessarily dirtier. ○​ Wealthier nations tend to have cleaner environments. ​ Environmental Kuznets Curve:​ ○​ Economic growth initially increases pollution. ○​ After a certain income threshold, pollution decreases due to better regulations and cleaner technologies.  ​ Challenges of Economic Growth and Pollution:​ ○​ Growth alone does not guarantee environmental protection. ○​ Poverty can be detrimental to sustainability. Case Study: Leaded Gasoline ​ Historical Perspective:​ ○​ Lead poisoning risks known since Roman times. ○​ Leaded gasoline phased out in the U.S. in the 1970s. ○​ Linked to crime rate reduction in the 1990s. ​ Economic & Social Costs:​ ○​ Reducing lead exposure had benefits 20 times greater than the costs. Economic Systems and Sustainability ​ Kenneth Boulding’s “Spaceship Earth” Concept:​ ○​ Economy as a closed system with finite resources. ○​ Shift from "cowboy economy" (unlimited expansion) to "spaceship economy" (sustainable resource use). ​ Circular Economy Model:​ ○​ Resource flow must be accounted for. ○​ Second law of thermodynamics (entropy) imposes limits on growth. Income Inequality, Literacy, and Economic Growth ​ Statistical Findings: ○​ Literacy rate and fertility significantly impact GDP. ○​ Income inequality (Gini coefficient) has no significant effect in the model. Labor Market & Economic Growth ​ January 2023 Jobs Report: ○​ Employment rose by 517,000. ○​ Unemployment at 5.7 million. ○​ Labor force participation rate at 62.4%. ​ Demographic Influences on Employment:  ○​ Baby boomers, women's workforce participation, and COVID-19’s long-term effects. Key Takeaways ​ Sustainability of Growth Depends On: ○​ Population control and technological advancement. ○​ Economic incentives for sustainability. ○​ Systemic thinking in managing resources. ​ Economic Growth & Environmental Protection: ○​ Richer nations can afford environmental protection, but growth alone is insufficient. ○​ Policy interventions are necessary to align markets with sustainability goals. Here is a detailed bullet-point outline of the presentation: Consumer Behavior – Spring 2023 Quote: “Without theory facts are silent.” – Friedrich August von Hayek Introduction ​ Overview of consumer behavior and its relevance. ​ Impact of economic conditions on consumer decision-making. ​ Importance of understanding consumer choices for market and policy decisions. Inflation and Economic Context January 2023 Inflation Report ​ Consumer Price Index (CPI) increased by 6.4% compared to the previous year. ​ Slowed from 6.5% in December, down from 9% in Summer 2022. ​ PCE Price Index (Personal Consumption Expenditures) vs. CPI: ○​ PCE includes all consumption expenses (e.g., healthcare costs covered by employers, Medicare, and Medicaid).  ○​ CPI reflects only direct out-of-pocket consumer costs. ○​ Different weighting: Healthcare (22% in PCE, 9% in CPI), Housing (42% in CPI, 23% in PCE). Main Topics 1.​ Definition and Importance of Consumer Behavior 2.​ Consumer Sentiment and Economic Indicators 3.​ Case Study: Carbon Border Tax 4.​ Key Economic Principles in Consumer Behavior 5.​ Demand Theory and Market Behavior 6.​ Fossil Fuel Subsidies and Market Inefficiencies Consumer Behavior: An Overview ​ Study of how individuals and groups choose products/services to satisfy needs. ​ Influences on consumers: ○​ Psychology, sociology, anthropology, marketing, demography, and economics. ○​ Group influence: Family, friends, reference groups. ○​ Emotions' role in purchasing decisions. Consumer Sentiment ​ Survey of Consumer Sentiment (University of Michigan)​ ○​ December 2022 index: 59.7 points, up from November (56.8%). ○​ Still 15% below a year ago, but improving due to inflation easing. ​ Historical Perspective:​ ○​ Consumer Sentiment Index trends from 2012-2022 and 1952-2022. Case Study: Carbon Border Tax ​ Measuring Carbon Emissions:​ ○​ Traditional focus on producers rather than consumers. ○​ Net emissions exporters: China, India, Russia, Saudi Arabia. ○​ Net emissions importers: U.S., Europe, Japan. ○​ Example: Australia shifted from net exporter to net importer in 2011 due to trade with China. ​ Embodied Carbon in Trade:​ ○​ Western Europe: 20-50% of consumption emissions are imported. ○​ U.S.: 11% imported emissions. ○​ China: 23% of emissions are exported. ○​ Suggestion: Allocating emissions responsibility to consumers. Economic Principles in Consumer Behavior Principle #1: Tradeoffs ​ Scarcity requires choices. ​ Resources are limited and must be allocated efficiently. Principle #2: Opportunity Cost ​ The value of the next-best alternative foregone. ​ Decision-making involves comparing trade-offs. Principle #3: Marginal Decision-Making ​ Decisions made at the margin. ​ Marginal cost vs. marginal benefit determines optimal behavior. Principle #4: Gains from Trade ​ Voluntary trade benefits all parties. ​ Trade allows for specialization and better resource allocation. Principle #5: Markets as Efficient Organizers ​ Markets help allocate resources efficiently. ​ Market prices reflect scarcity and value. Demand and Market Behavior Definition of Demand ​ The amount of a good consumers are willing and able to buy at various prices. ​ Law of Demand: Higher price → Lower demand (and vice versa). Demand Influencers ​ Income levels (normal vs. inferior goods). ​ Prices of related goods (substitutes and complements). ​ Consumer preferences and trends. ​ Expectations of future prices. ​ Number of buyers in the market. Graphical Representation of Demand ​ Demand Schedule: Table showing price vs. quantity demanded. ​ Demand Curve: Graphical representation of the relationship. ​ Factors shifting demand curve: Changes in income, preferences, or market conditions. Fossil Fuel Subsidies: An Economic Inefficiency Why Do We Pay $500B in Fossil Fuel Subsidies Annually? ​ Subsidies mostly benefit the wealthy. ○​ Only 8% of subsidies go to the poorest 20%. ○​ 43% go to the richest 20%. ​ Big energy producers are the largest beneficiaries. ​ Countries with subsidies face budget deficits and economic inefficiencies. Economic and Environmental Costs of Subsidies ​ Global fossil-fuel subsidies reached $544 billion in 2012. ​ Including lost tax revenue, the figure rises to $2 trillion (8% of government revenue). ​ Phasing out subsidies could: ○​ Reduce global energy demand by 4.1%. ○​ Cut CO2 emissions by 1.7 Gt. ○​ Free up resources for infrastructure and economic growth. Consumer Decision-Making & Future Topics ​ Half of daily decisions involve consumption. ​ Understanding consumer behavior helps predict market trends. ​ Next session: Exploring production decisions and their impact on markets. Markets, Efficiency & Public Policy ​ Introduction ○​ Overview of market failures ○​ Role of government and policy in addressing inefficiencies Market Failure ​ Definition ○​ Competitive equilibrium is typically Pareto efficient ○​ Market failure occurs when resources are allocated inefficiently ​ Sources of inefficiencies ○​ Missing or incomplete property rights ○​ Externalities ○​ Asymmetric information ○​ Incomplete contracts Examples of Market Failure ​ Health and Environment ○​ Flu Vaccination: Individual decisions impact public health ○​ Pesticides in the Caribbean: Pollution from banana plantations harmed local seafood and residents ○​ Overuse of Antibiotics: Leads to antibiotic-resistant bacteria Why Do Markets Fail? ​ Conditions for efficient markets ○​ Well-defined private property rights ○​ Effective government institutions ○​ Social norms ensuring property rights respect ○​ Complete and enforceable contracts ​ When do markets fail? ○​ Property rights are missing or incomplete ○​ Difficulties in enforcing contracts Externalities: A Major Cause of Market Failure ​ Definition ○​ Uncompensated spillover effects from economic activities  ​ Examples ○​ Water Pollution: Industrial waste affects fisheries ○​ Air Pollution (PM 2.5): Harmful health effects ​ Solutions ○​ Taxes, subsidies, and tradable permits to correct market inefficiencies Correcting Market Failures ​ Solution 1: Private Bargaining ○​ Theoretical resolution between polluters and victims ○​ Challenges: ​ Coordination and collective action problems ​ Difficulty in determining compensation ​ Enforcement issues ​ Solution 2: Government Policies ○​ Regulations: Limiting harmful production levels ○​ Pigouvian Taxes & Subsidies: Aligning private costs with social costs ○​ Compensation Requirements: Polluters pay affected parties Pollution & Market Failures ​ Why Markets Create Pollution ○​ Natural resources like air and water are often "underpriced" ○​ Lack of ownership leads to excessive use and pollution ​ Economic Solutions ○​ Pollution Taxes: Encourages producers to account for environmental costs ○​ Carbon Pricing: A tool for reducing greenhouse gas emissions Public Goods & Common Pool Resources ​ Public Goods ○​ Characteristics: Non-excludable and non-rival ○​ Example: Coast Guard services ○​ Free Rider Problem: People benefit without paying ○​ Government Role: Providing and funding public goods through taxes ​ Common Pool Resources ○​ Characteristics: Non-excludable but rivalrous ○​ Example: Overfishing in open waters (Tragedy of the Commons) ○​ Government Solutions: Regulation, taxes, and access fees Efficiency & Government Intervention  ​ What is Efficiency? ○​ Pareto Efficiency: No one can be made better off without making someone worse off ○​ Potential Pareto Improvement (Hicks-Kaldor Criterion): Gains exceed losses, making compensation possible ​ Case Study: California Water Pricing ○​ Agricultural water is cheaper than urban water, leading to inefficient usage ○​ Proposal: Unified pricing for better resource allocation ○​ Policy not enacted due to fairness concerns Should Markets Allocate Everything? ​ Ethical Concerns ○​ Repugnant Markets: Ethical concerns about monetizing certain goods (e.g., organ sales, slavery) ○​ Merit Goods: Essential goods (e.g., education) should be accessible to all, not just market participants ​ Limitations of Markets ○​ Social norms may be undermined by market mechanisms ○​ Alternative institutions (governments, families) may be more effective Conclusion ​ Markets are powerful but not always perfect ​ Government intervention can help but may also have limitations ​ Balancing efficiency, fairness, and sustainability is key in addressing market failures Managing the Commons ​ Introduction ○​ Defining the "Commons" and resource-sharing challenges ○​ Tragedy of the Commons and its implications ○​ Importance of governance in managing shared resources The Commons: Many Examples  ​ Real-World Cases ○​ Lobstering in Maine ○​ Community gardens in Mozambique ○​ Monte Alban Archaeological Park, Mexico ○​ Deforestation in Uganda ○​ Whale watching in Massachusetts ○​ The depletion of the Aral Sea Tragedy of the Commons ​ Garrett Hardin's 1968 Concept ○​ Overuse of shared resources leads to depletion ○​ Individual incentives vs. community well-being ○​ Example: Overgrazing in a communal pasture ​ Key Takeaways ○​ Each person benefits privately while costs are shared ○​ Without regulation, shared resources are exhausted ○​ Hardin’s proposed solution: "Mutual Coercion Mutually Agreed Upon" Historical Perspectives on Commons Management ​ Ancient Thinkers ○​ Aristotle: "What is common to many receives the least care." ○​ Lloyd (1833): Individual benefit outweighs shared sacrifice ○​ Gordon (1954): Bioeconomic model explaining overfishing Modern Examples of Commons Issues ​ Traffic & Infrastructure ○​ Traffic congestion as a modern commons problem ○​ Freeways and ride-sharing innovations (Uber, Lyft) as potential solutions ​ Environmental Issues ○​ Rainforest destruction driven by economic incentives ○​ Overfishing and biodiversity loss ○​ Climate change and ozone depletion The Prisoner’s Dilemma & Commons Problems ​ Game Theory Application ○​ Individual rationality leads to collective irrationality  ○​ Cooperation is often against short-term self-interest ○​ The dilemma illustrates why commons problems persist Criticisms & Extensions of Hardin's Theory ​ Alternative Views on Commons Management ○​ Ciriacy-Wantrup: Common property is not the same as open access ○​ Bromley: Common property can be managed effectively with governance ○​ Axelrod & Runge: Repeated interactions allow cooperation to evolve ○​ Elinor Ostrom: Many communities successfully manage shared resources Successful Commons Management Strategies ​ Elinor Ostrom's Design Principles 1.​ Clearly defined boundaries for resource users 2.​ Rules adapted to local conditions 3.​ Participation of resource users in decision-making 4.​ Monitoring by the community 5.​ Graduated sanctions for rule violators 6.​ Conflict resolution mechanisms 7.​ Nested institutions for governance at multiple levels Case Studies in Commons Management ​ Traditional Solutions ○​ Example: Driftwood Collection in Yorkshire ​ Informal rules for fair allocation evolved naturally ○​ Example: Nepalese Irrigation Systems ​ Community-managed systems are more effective than state-controlled ones Challenges in Governing Commons ​ When Is Exclusion More Costly? ○​ Factors that complicate exclusion: ​ Large & diverse user groups ​ Lack of trust or social networks ​ Highly mobile or difficult-to-monitor resources ​ Conflicts Between Individual & Group Interests ○​ Rational self-interest often conflicts with long-term collective welfare  ○​ Example: Overfishing despite awareness of declining stocks International Policy Interventions ​ The Kigali Accord ○​ Global agreement to phase out hydrofluorocarbons (HFCs) ○​ Expected to prevent 0.5°C in global warming by 2100 ○​ Rich countries financing the transition for poorer nations Key Takeaways ​ One-Size-Fits-All Approaches Don’t Work ○​ Commons problems require flexible, community-based governance ​ Cooperation Can Evolve ○​ Institutions & cultural adaptations enable sustainable resource use ​ Success is Context-Dependent ○​ What works in one setting may fail in another Introduction & Key Quote ​ Key Quote: David Hume – “Facts alone cannot tell us what we should do.” The Importance of Discounting in Economic Decisions ​ Climate Change Example:​ ○​ If a discount rate of 7% is used, the present value of future benefits significantly diminishes. ○​ Global GDP in 2200 is estimated at $8 quadrillion, but in today’s terms, that would be valued at only $10 billion. ○​ The implication: It might seem irrational to spend more than $10 billion today to prevent climate catastrophe 200 years from now. ​ Personal Finance Example:​ ○​ If you inherit a discount bond ($10,000 face value, maturing in 5 years): ​ If one person wants immediate cash and the other prefers waiting, they must determine a fair price based on present value. Core Concepts of Discounting ​ Definition: Discounting reduces the importance of future costs and benefits by converting them into present values. ​ Implications: ○​ Higher discount rates lower the present value of future benefits. ○​ Helps evaluate long-term investment decisions. Compound Interest vs. Discounting ​ Compound Interest:​  ○​ A $100 investment at 10% annual return grows exponentially over time: ​ Year 1: $110, Year 2: $121, Year 10: $259.37, Year 20: $672.75, Year 100: $34,000. ○​ Formula: FV = PV(1+r)ⁿ (Future Value with compounding growth rate). ​ Discounting (Opposite of Compounding):​ ○​ Future values are discounted back to present terms: ​ PV = FV / (1 + r)ⁿ ○​ Example: $200 in 12 years is worth $100 today at a 6% discount rate. Real-World Applications of Discounting ​ Lottery Example:​ ○​ A $1 million prize paid over 20 years ($50,000 per year) is not worth $1 million today. ○​ At an 8% discount rate, its present value is only $547,953.91. ​ Project Investment Example:​ ○​ Comparing projects with 5% discount rate: ​ Project A: $100 annual cost for 5 years. ​ Project B: $500 upfront cost. ​ Project C: No immediate cost but major costs later. ○​ Discounting helps determine which project is cost-effective. Long-Term Financial Planning & Behavior ​ Survey (1998):​ ○​ People who planned for longer than 10 years accumulated $240,699 more wealth than those who planned only for the short term. ​ Time, Money & Impatience:​ ○​ People tend to value short-term rewards more than long-term gains. ​ Example: Dam Construction:​ ○​ Cost: $20 million upfront. ○​ Annual benefits: $2 million for 30 years.  ○​ Net present value (NPV) is calculated using a 5% discount rate. Why Use a Discount Rate? ​ Two Reasons:​ ○​ Opportunity Cost of Capital – Money could be invested elsewhere for returns. ○​ Time Preference in Consumption – People prefer immediate rewards. ​ The Stern Report on Climate Change:​ ○​ Used a 0.1% social discount rate. ○​ Controversial because standard economic models use higher rates. ○​ Raises ethical questions: Are future generations worth less than present ones? Government-Set Discount Rates ​ Office of Management and Budget (OMB) guidance:​ ○​ Recommends 7% real discount rate for federal agencies. ○​ Lowered from 10% (before 1992). ​ GAO & CBO:​ ○​ Use Treasury bond rates for government projects. ​ Example: Climate Change Reduction Cost:​ ○​ Reducing $500 billion in future damages: ​ At a 2% discount rate, today's cost = $185.8 billion. ​ At a 10% discount rate, today's cost = $4.3 billion. ○​ The higher the discount rate, the less value we place on the future. Hyperbolic Discounting: Why We Make Short-Term Choices  ​ Definition:​ ○​ People prefer small immediate rewards over larger delayed rewards. ○​ Example: ​ $50 now vs. $100 in a year – most people choose $50 now. ​ $50 in 5 years vs. $100 in 6 years – most people now choose $100. ​ Real-world implications:​ ○​ Linked to poor financial planning, addiction, and procrastination. ○​ Example: Teen smoking predictions: ​ Only 15% predicted they would smoke in 5 years. ​ In reality, 43% continued smoking. ​ Self-Control & Impulse Spending:​ ○​ Ice-Glass Method: Freeze credit cards in water to delay impulsive purchases. ○​ Concept from Predictably Irrational by Dan Ariely. Philosophical & Ethical Perspectives ​ Tim Brennan on Citizens vs. Consumers:​ ○​ As consumers, we want instant gratification. ○​ As citizens, we care about future generations. ​ How to Choose a Discount Rate?​ ○​ No single correct rate exists. ○​ Crucial for climate change, biodiversity loss. ○​ Geoffrey Heal: “Discount rate is not something we measure: it is something we choose.” ​ Whale Hunting Example (Clark, 1973):​ ○​ If whalers’ discount rates exceed whale growth rates, whales will be hunted to extinction. Is Discounting Sustainable? ​ Hartwick’s Cake-Eating Dilemma:​  ○​ If we discount too heavily, we consume all resources rather than invest for the future. ​ Ethical Concerns (Rawls’ Theory):​ ○​ All generations should be equally well-off. ○​ “Veil of ignorance” implies a zero discount rate. Final Thoughts & Challenges ​ Distributive Effects of Public Projects:​ ○​ Kaldor-Hicks Rule – Projects should maximize total benefits, even if some lose out. ○​ Future generations can’t vote—who represents them? ​ Time Inconsistency & Hyperbolic Discounting:​ ○​ We overestimate our future discipline (e.g., planning to wake up early but hitting snooze). ○​ Ulysses & the Sirens analogy – We must precommit to long-term decisions. ​ Big Question: Can Society Act as a Single Decision-Maker?​ ○​ Problems: ​ Future generations have no voice. ​ Uncertainty of long-term consequences. ○​ Alternatives? ​ Ethical approaches beyond pure economic models. Conclusion ​ Efficiency: Convert future values into present values. ​ Fairness & Sustainability: Long-term welfare considerations. ​ Robert Solow: “Maybe the idea of a unitary decision-maker is not very helpful…” ​ Final Thought:​ ​ “The trouble is, you think you have time.” – Gautama Buddha​ ​