Economics: The Hopeful Science

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Economics The Hopeful Science

• John Quiggin
• University of Queensland

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Web sites

• RSMG http//www.uq.edu.au/economics/rsmg/index.htm
  
• Quiggin http//www.uq.edu.au/economics/johnquiggin
  
• WebLog http//johnquiggin.com

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Two kinds of pessimists

• Environmental pessimists claim that we cannot
  possibly sustain improving standards of living
  without wrecking the environment.
• Club of Rome, Zero Economic Growth
• Economic pessimists claim that we must accept
  grave damage to the environment as the cost of
  economic progress.
• Wall Street Journal, Bjorn Lomborg
• Two sides of the same coin
• Underestimate flexibility of society and economy

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The dismal science

• Coined by essayist Thomas Carlyle
• Usually associated with his hostility to Malthus
  and Ricardo
• Idea of a stationary state
• Checks to population growth
• Actually it occurs in a racist tract
• An Occasional Discourse on the Nigger Question
• Carlyle attacks John Stuart Mill and supports
  slavery in preference to wage employment

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Malthusian economics

• Rev. Thomas Malthus
• Population growth is geometric, technical
  improvement is arithmetic
• Any increase in wages will be offset by faster
  population growth
• No point in redistributing income
• A generally dismal view
• Now often held by critics of economics
• Dont always recognise their sources

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Other 19th century Malthusians

• Ricardo and the stationary state
• Driven by fixed quantity of natural resources
  (land)
• Jevons on The Coal Question
• An early version of Peak Oil ?

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Why Malthus and Jevons were wrong

• Technological progress outpaced population growth
• Economic growth theory
• Driven by technological progress
• Growth in resource inputs not essential
• Ideas can be shared costlessly
• Endogenous growth theory

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Re-emergence of the Malthusian debate in the 20th
century

• Concerns about resource exhaustion and
  destruction of the environment
• Silent Spring
• Limits to Growth
• Fears of resource exhaustion were largely
  misplaced
• Markets responded to shortages
• Environmental damage real and growing
• No market for environmental protection

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Policy responses

• Regulation and pollution control
• Emissions standards for factories, cars
• Taxes on pollution
• Fuel taxes
• Congestion charges
• Tradeable permits
• SO2 pool in US
• Water rights in Murray-Darling
• Beginnings of carbon trading

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A mixed record

• Successes
• Urban air pollution
• in developed countries
• Montreal protocol on CFCs
• Failures
• Fisheries
• Atlantic cod, many others
• Tropical biodiversity
• Climate change (so far)

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Smog in Los Angeles
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Global temperatures, 1000-2004
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Is economics part of the problem ?

• No understanding of resource constraints ?
• All about Gross Domestic Product (GDP) ?
• Economic growth versus environment ?

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Constraints choices

• Individual, household, social, global
• Market goods and services, publicly-provided
  goods and services, natural goods and services
• Better schools or bigger houses
• More roads or cleaner air
• Not to choose is to make a choice

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Markets, resources and the environment

• Increase in price of scarce resources drives
• search for alternatives
• induced innovation
• reduction in demand
• Need policies to make price of environmental
  damage effective

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What's wrong with Gross Domestic Product ?

• Gross
• no account taken of depreciation
• Human-made capital
• Natural and environmental capital
• Domestic
• Includes income accruing to foreigners
• Product
• No value for leisure or household activity
• Not a good measure of economic welfare

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Why measure it then?

• Easy to calculate changes from quarter to quarter
  or year to year
• Good measure of economic activity in the short
  term
• Useful in macroeconomic management
• Not used by (sensible) economists to evaluate
  resource use and allocation

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How economists think about growth

• Economic growth means expansion of the range of
  choices available to us
• Goods, services, leisure, natural amenities
• Environmental protection is a normal good
• The higher our income, the more we are willing to
  pay to protect the environment
• Not automatic
• Market failure
• Need for environmental policy

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How can economics help?

• Better understanding of choices available to us
• More cost-effective policies
• Identify gainers and losers
• Compensating losers can help secure agreement for
  beneficial policy
• Adjustment policies for fisheries
• Predictable problems when concentrated,
  influential groups benefit from status quo
• Oil and coal industries and climate change

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The economic necessity of environmental protection

• Natural inputs are essential to production (land,
  water)
• Natural outputs are an essential part of
  consumption (air)
• Trade-offs are inevitable
• But terms are often favorable
• Well-designed environmental protection is highly
  cost-effective

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Responding to climate change

• Need to reduce net CO2 emissions by at least 50
  per cent relative to business as usual
• Externality
• Regulation and standards not cost-effective
• Carbon taxes or carbon credits
• Create incentive to reduce, absorb, offset
  emissions

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Prices work on many marginsTransport

• CO2 emissions can be reduced by
• Less carbon-intensive fuels
• More fuel-efficient vehicles
• More people per private vehicle trip
• More public transport
• Shorter trips
• Fewer trips
• Small adjustments on each margin
• Big reductions in total emissions

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Prices work on many marginsElectricity

• CO2 emissions can be reduced by
• Alternative sources for generation
• Less carbon-intensive fuels (gas)
• Carbon capture/sequestration
• Reduced transmission losses
• Greater energy efficiency of users
• Reductions in electricity-intensive uses

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How much would it cost ?

• Standard economic analysis
• Cost of a tax is determined by
• Share of total output
• Elasticity of demand
• Carbon-based fuels around 6 per cent of total
  economy
• Long-run elasticity close to 1
• Cost is around 3 per cent of total output
• ABARE detailed model yields similar value

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A lot or a little?

• Equal to 1-2 years economic growth
• A lot if incurred in a short time
• A little if incurred gradually over time
• Time-frame is present-2050
• Stabilisation means that goods and services
  output in 2050 will be that of 2049 under
  business as usual
• difference is smaller when economic impacts of
  climate change are considered

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Water in Australia

• Big, but soluble problems
• Urban demand outstripping supply at current
  prices
• Over-allocation of irrigation water
• Inadequate environmental flows
• Climate change reduces inflows
• Mixture of engineering, environmental and
  economic instruments needed

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Cautiously hopeful

• We can have
• Steadily improving living standards for everyone
• Preservation of current environment
• Restoration of much past damage
• BUT
• This wont happen automatically
• Will we choose wisely ?