EXAM SPRING 2016 1
1.) Pleaseconsider “Sustainable Economic Development” by the Institute forSustainable Communities (see Week One). On page 6, five “KeyChallenges and Needs” are identified. Please select one of these(for example, Collaboration) and discuss the economics of thechallenge or need. In other words, what is the allocation problemand why can’t the private participants achieve an optimal outcome. Be sure to define and related terms.
Financingpresents a formidable challenge to ensuring sustainable economicdevelopment. Both private and public entities are required to makesignificant investments so as to acquire renewable technologies.However, financial institutions have limited resources to spare forrenewable technologies. In this regard, new financing models areneeded to provide capital for the creation of a sustainable economy(ISC, 2011).
The allocationproblem concerns the fact that available financial resources do notsuffice to cater for all uses. In many instances, activities that areurgent and productive are usually prioritized during the allocationof resources (ISC, 2011). Therefore, setting aside resources forsustainable economic development is often overlooked. This is becausesustainable economic development does not seem urgent or evennecessary. Furthermore, the rewards from sustainability do not occurmomentarily. It usually takes considerable time for the benefits ofsustainability to be visible (ISC, 2011).
Privateparticipants fail to achieve an optimal outcome because it is unclearwhich activities would lead to better sustainability. It is alsodifficult to highlight the role of local governments in helpinginstitutions to acquire finances for sustainable development (ISC,2011). Private participants also fail to attain a favorable outcomesince there lacks a framework for forming public-privatepartnerships. Therefore, private partners lack enough motivation topursues renewable technologies.
2.) Pleaseconsider Pezzey and Toman 2002 “The Economics of Sustainability: AReview of Journal Articles.” On page 23 in their concludingremarks, they assert “a sustainability objective or standard…ismore than a simple PV criterion.” Please discuss.
Sustainability isan enduring quality that companies and industries strive to attain.The levels of utility and consumption are assumed to approach zero inthe long-term. Such an eventuality primarily occurs after an initialthreshold has been obtained. Nevertheless, a sustained level ofutility and consumption is impossible to attain. Therefore, it isexpected that nonrenewable resources will continue to be scarce.Also, utility will be governed by positive discount rates (Pezzey &Toman, 2002). Consumption of a resource is usually concentratedduring the period which it exists in large quantities. In lateryears, consumption plummets along with resource availability.
The gradualdepletion of resources limits the level of output. In this respect,capital investment does not suffice to cover the negative effects ofdepletion on output. Also, the constant depletion of resourcesundermines the effectiveness of sustainable development. Therefore,ongoing technical input is required to counter the debilitatingeffects of resource depletion (Pezzey & Toman, 2002). Examiningthe shifts in consumption level can help to show that having asocietal objective of sustainability differs from present valueoptimality.
The economicgrowth theory stipulates that the maximization of consumption levels.On the other hand, constant consumption weakens sustainability andreduces the maximization of present value consumption. Sustainabilitycan be achieved if environmental externalities and marketinefficiencies are internalized (Pezzey & Toman, 2002).Therefore, a standard for sustainability is more than aninstantaneous, present value criterion.
3.) Please defineand discuss the Environmental Kuznets Curve. Siebert 2005 (page 279)and Harris and Roach 2013 (page 410) provide insight.
EnvironmentalKuznets Curves can be understood through studying the impact ofeconomic growth on environmental quality. A wealthier nation couldutilize consume more energy and resources while producing morewastes. On the other hand, it is possible that richer nation wouldinvest more resources in renewable energy, formulate effectivepolicies, and install sophisticated equipment. Environmental qualityis adjudged to be both a normal and luxury good (Harris & Roach,2013). As a normal good, people would ordinarily spend more as theirincome level rises. As a luxury good, people would spenddisproportionately higher portions of their income as their incomelevel rises.
Initially,economic growth would lead to environmental degradation. However, inthe long-run, a wealthy nation would have sufficient resources toenhance environmental quality. The Environmental Kuznets Curve (EKC)arises from the supposition that environmental impact rises witheconomic growth up to a certain level. Beyond a particular incomelevel, environmental impacts begin to decrease. This is becauseabatement activities and innovative technologies are applied toreduce harmful emissions (Siebert, 2005). The EKC hypothesis showsthe relationship between environmental impacts and income in aninverted U-shape curve. This relationship is well-established forpollutants such as nitrogen oxides, particulate matter, and sulfurdioxide. Nevertheless, the EKC hypothesis does not hold for carbondioxide emissions (Harris & Roach, 2013). Therefore, the EKChypothesis has been used to discredit the promotion of economicgrowth as a means of reducing greenhouse gas emissions.
4.) Pleaseresearch the ultimatum game and its game theory application todecision-making and market coordination. How might the ultimatumgame help solve the assurance game problem introduced by Hanley etal. 1997 (see page 14-17).
The ultimate gamerefers to where a player makes a proposal and thereby gives the otherplayer the chance to either accept or reject the proposal. The firstplayer also acts as the proposer. In this respect, he acquires acertain sum of money and proposes a method of sharing the sum withthe other player. The second player has the discretion to choosewhether to accept the proposal. If the proposal is accepted, then themoney is shared accordingly. On the other hand, neither player isentitled to the money when the proposal is rejected. The ultimategame can be used to solve the assurance game problem.
In reducingcarbon emissions, two countries can simultaneously decide not topursue environmental quality because such an action favors theirinterests. A simultaneous decision aimed at maximizing utility wouldyield an unfavorable outcome in comparison to the co-operativesolution (Hanley, Shogren, & White, 1997). Strictly dominatedstrategies could lead countries to miss out on the benefits ofreducing greenhouse emissions. Therefore, the ultimate game can beused to acquiring binding commitments that can override the‘prisoners’ dilemma. The first country can propose a method ofsharing the profits provided the second state guarantees it will cutits emissions. Having such a mutual interest will ensure that bothcountries reduce greenhouse emissions.
5.) Please answerHarris and Roach 2013, Discussion Question #2 (page 429):
“What steps ifany, do you think should be taken to promote a green economy in yourcountry or region? What steps would be most effective? Can youpropose policies that businesses might support?”
Several steps canbe taken to promote a green economy. First, the government needs toincrease its commitment to creating a green economy. Monetary andfiscal policies can be formed so as to ensure extensive research anddevelopment into renewable energy technologies. The government couldsubsidize the cost of renewable technologies so as to enablecompanies to make a smooth transition into a green economy withoutincurring costs. Public expenditure on unproductive ventures can bereduced so as to create funds for renewables (Harris & Roach,2013). Fuel subsidies should also be gradually reduced so as todiscourage the use of fossil fuels.
Legal andregulatory measures can also be formulated so as to promote a greeneconomy. A gap analysis can be used to address the seemingdifferences between national environmental laws and global bestpractices. Such an analysis can be utilized as a guide forformulating legal reforms. For example, the use of fossil fuels canbe outlawed beyond prescribed limits. The wastes produced byparticular company could also be used as raw materials in a differentindustry. Financial instruments can also be used to incentivize theadoption of green technologies. Nevertheless, the most practical stepconcerns governmental intervention and support. Businesses mightsupport policies that reward the adoption of renewable technologies.They may also support the creation of working groups set up toevaluate the effectiveness of proposed renewables for different firms(Harris & Roach, 2013). Also, businesses may support regularsensitive analysis aimed at assessing the merits of renewabletechnologies.
Hanley, N., Shogren, J. F., & White, B. (1997). Environmentaleconomics: In theory and practice. New York, NY: OxfordUniversity Press.
Harris, J. M. & Roach, B. (2013). Environmental and naturalresource economics: A contemporary approach. Armonk, NY: Sharpe.
Institute for Sustainable Communities (ISC). (2011). Sustainableeconomic development. New York, NY: The Rockefeller Foundation.
Pezzey, J. & Toman, M. A. (2002). The economics ofsustainability. Burlington, Vt.: Ashgate/Dartmouth.
Siebert, H. (2005). Economics of the environment: Theory andpolicy. New York, NY: Springer.