The health of an economy is generally measured in terms of the growth rate in GDP. A healthy economy is portrayed as one that is growing. Declining GDP, by contrast, is seen as a sign of economic malaise; not surprisingly, people don’t want rising unemployment and falling consumption. The recession of 2008/9 has generally been seen as bad news.
But is GDP a good indicator of human well-being? The problem is that GDP measures the production of goods and services for exchange. True, such goods and services are a vital ingredient in determining human well-being. But they are not the only one. Our lives are not just about consumption. What is more, many of our objectives may go beyond human well-being. For example, the state of the environment – the flora and fauna and the planet itself.
Then there is the question of the capital required to produce goods and maintain a healthy and sustainable environment. Capital production is included in GDP and the depreciation of capital is deducted from GDP to arrive at a net measure. But again, things are left out of these calculations. We include manufactured capital, such as factories and machinery, but ignore natural capital, such as rain forests, coral reefs and sustainable ecosystems generally. But the state of the natural environment has a crucial impact on the well-being, not only of the current generation, but of future generations too.
In the video podcast below, Professor Sir Partha Dasgupta, from the Faculty of Economics at the University of Cambridge and also from the University of Manchester, argues that the well-being of future generations requires an increase in the stock of capital per head, and that, in measuring this capital stock, we must take into account natural capital. In the paper to which the podcast refers, he argues “that a country’s comprehensive wealth per capita can decline even while gross domestic product (GDP) per capita increases and the UN Human Development Index records an improvement.”
Nature’s role in sustaining economic development (video podcast) The Royal Society, Partha Dasgupta
Nature’s role in sustaining economic development Philisophical Transactions of the Royal Society B, vol 365, no. 1537, pp 5–11, Partha Dasgupta (12/1/10)
GDP is misleading measure of wealth, says top economist University of Manchester news item (21/12/09)
Economics and the environment: Down to earth index Guardian (28/12/09)
Questions
- Why might a rise in GDP result in a decline in human well-being?
- In what sense is nature ‘over exploited’?
- What is meant by ‘comprehensive wealth’ and why might comprehensive wealth per capita decline even though the stocks of both manufactured capital and human capital are increasing?
- What is meant by ‘shadow prices’ in the context of natural capital?
- How might economists go about measuring the shadow prices of capital?
- What factors should determine the rate of discount chosen for projects that impact on the future state of the environment?
At the end of two weeks of often acrimonious wrangling between representatives from 193 countries, an agreement – of sorts – was reached at the climate change summit in Copenhagen. What was this agreement? It was an ‘accord’ brokered by the USA, China, India, Brazil and South Africa.
This Copenhagen Accord contains three elements. The first is a recognition of the need to prevent global temperatures rising by more than 2 degrees Celsius above pre-industrial levels. The second is a commitment by developed countries to give $30bn of aid between 2010 and 2012 to developing countries for investment in green technology and to mitigate the effects of climate change. In addition, a goal was set of providing $100bn a year by 2020. The third is for rich countries to give pledges on emissions reductions and for developing countries to give pledges on reducing emissions increases. Developed countries’ pledges will be scrutinised by the UN Framework Convention on Climate Change, while developing countries will merely be required to submit reports on their progress in meeting their pledges.
But this is only an accord. It has no legal status and was merely ‘recognised’ by the countries at the conference. What is more, the target of limiting temperature rises to 2C does not contain a date by which temperature rises should peak. Also, as countries are not required to submit targets for emissions until February 2010, it is not clear how these targets will be kept low enough to meet the temperature target and there is no identification of penalites that would apply to countries not meeting their pledges.
Not surprisingly, reactions around the world have been mixed. The following podcasts and articles look at these reactions and at the economic mechanisms that will be required to meet the 2C limit
Podcasts and videos
Recriminations after Copenhagen summit (video) BBC News, David Loyn (21/12/09)
Copenhagen special: Climate change talks end in failure Guardian podcast (19/12/09)
Where do we go after Copenhagen? BBC Today Programme (21/12/09)
Articles
What was agreed and left unfinished in U.N. climate deal Reuters of India Factbox (20/12/09)
Copenhagen deal: Key points BBC News (19/12/09)
Copenhagen deal reaction in quotes BBC News (19/12/09)
Copenhagen climate summit fails green investors BBC News, Damian Kahya (22/12/09)
Why did Copenhagen fail to deliver a climate deal? BBC News (22/12/09)
Copenhagen climate accord: Key issues BBC News (19/12/09)
Harrabin’s Notes: After Copenhagen BBC News, Roger Harrabin (19/12/09)
Copenhagen climate conference: Who is going to save the planet now? Telegraph, Louise Gray (21/12/09)
Copenhagen’s One Real Accomplishment: Getting Some Money Flowing New York Times, James Kanter (20/12/09)
Copenhagen climate summit: plan for EU to police countries’ emissions (including video) Telegraph, James Kirkup, and Louise Gray (19/12/09)
The road from Copenhagen Guardian, Ed Miliband (UK Secretary of State for Energy and Climate Change) (20/12/09)
Carbon Prices Tumble After ‘Modest’ Climate Deal Bloomberg, Mathew Carr and Ewa Krukowska (21/12/09)
Copenhagen deal causes EU carbon price fall BBC News (21/12/09)
Have the hopes of environmentalists been dashed? Financial Times, Clive Cookson (21/12/09)
EU reflects on climate ‘disaster’ Financial Times, Joshua Chaffinin (22/12/09)
China not to blame on climate China Daily, Zhang Jin (23/12/09)
Selling a low-carbon life just got harder Times Online, Jonathon Porritt (21/12/09)
Better than nothing The Economist (19/12/09)
Copenhagen has given us the chance to face climate change with honesty Observer, James Hansen (27/12/09)
Questions
- What incentives exist for countries to agree to tough pledges to reduce emissions?
- Was the very limited nature of the Copenhagen Accord a Nash equilibrium? Explain.
- Is the carbon price a good indicator of the effectiveness of measures to curb emissions?
- Must any agreement have verifiable targets for each country of the world if it is to be successful in curbing carbon emissions?
- Is a cap-and-trade system the best means of achieving emissions reductions? Explain.
When we examine industries and markets in economics, one of the key things we look for is how competitive the market is. A question that we ask is, under what type of market structure is this firm operating? To answer this, we will need information on the number of competitors, the products, prices, advertising, profits, efficiency and how the firms are likely to behave in both the short and long run.
A lot of the time firms are independent: their behaviour doesn’t affect the actions of rivals. This is usually because each firm within the industry only has a relatively small market share. If one firm changes the price, or how much it spends on advertising/product development, this won’t have an impact on the market equilibrium.
However, it’s not as easy for an oligopolist, as interdependence is a key characteristic of this market structure. As such, it’s not surprising that firms have a decision to make: should they compete with the other firms and try to maximise our own profits, or should they collude and try to maximise industry profits? Whilst collusion is illegal in many countries, activities such as price fixing do go ahead and it can be difficult to prove, as the ACCC is finding with a petrol price-fixing case in Melbourne. In 49 of the 53 weeks studied, when one of the big petrol stations changed their price, the industry followed these movements exactly.
As competition in a market decreases, it could be a sign that an oligopoly is developing. A few firms are beginning to dominate the market and this could spell trouble for customers. Indeed, in the Australian banking sector, there are concerns that an oligopoly will develop if more competition is not introduced. The Deputy Chairman of the Australian Bankers’ Association said: “We’ve got four major banks that are repricing all their commercial and small business customers’ margins upwards”. Customers may therefore lose out with higher prices and less choice, while the dominant firms see their profits growing.
The market structure under which a firm is operating will have a major impact on its decisions and the outcomes in the market, as shown in the articles below.
ACCC on safe political ground in targeting the Mobil takeover The Australian Business, John Durie and Martin Collins (3/12/09)
Nippon Steel Chairman warns of Australian oligopolies Market Watch, Stephen Bell (10/11/09)
Government’s bank guarantee hurting BOQ: Libby Business Day (2/12/09)
Regulators to scrutinise BHP and Rio’s Australian joint venture Financial Times, William McNamara and Elizabeth Fry (7/12/09)
Crackdown on price fixing draws mixed reaction The Korea Herald (7/12/09)
Questions
- What are the main characteristics of an oligopoly?
- Illustrate a cartel that fixes prices and show how a member of this cartel must sell at that price and at a given quantity.
- Some factors make collusion more likely to occur and more likely to succeed. In the Australian banking sector, which factors do you think are allowing price fixing to occur?
- Is the example of petrol price fixing barometric price leadership or dominant firm price leadership? Explain both of these terms and use a diagram, where possible, to illustrate the effects.
- The articles suggest that oligopolies are bad for competition. Explain why this is the case.
- To what extent are oligopolies against the public interest? Use examples from the articles to back up your argument.
In the run-up to the United Nations climate Change conference in Copenhagen from 7 to 18 December, many countries have been setting out their preliminary positions. The conference aims to set the terms for the agreement that will succeed the Kyoto Protocol in 2012.
Senior scientists, economists and politicians have been warning about the dire necessity of reaching a comprehensive agreement. One such economist is Sir Nicholas Stern. He argues that the EU should impose a unilateral cut in greenhouse gas emissions of 30% from 1990 levels by 2020, irrespective of the any agreement in Copenhagen. The EU has pledged to increase its targeted cut from 20% to 30% only if substantive progress is made at the talks.
Other countries have set out their preliminary positions. China has offered to reduce its carbon intensity by 40% (i.e. the proportion of carbon emissions to GDP); the USA has offered to reduce emissions by 17% by 2020 compared with 2005 levels; and India has offered to reduce its carbon intensity by 24% over the same period.
However, as the Washington Post article below states, “During a weekend meeting, India, along with China, Brazil, South Africa and Sudan, decided it would not agree to legally binding emission cuts, international verification of reductions without foreign funding and technology, and imposition of trade barriers in the name of climate change.”
Meanwhile the news from Australia has come as a blow to those seeking to extend tradable permit schemes around the world. The Australian senate has rejected a bill to set up an Emissions Trading Scheme (ETS), designed to cut Australia’s carbon emissions by up to 25% below 2000 levels by 2020.
Copenhagen climate talks: Main issues Independent (30/11/09)
Factfile on UNFCCC, Kyoto Protocol, Copenhagen talks Independent (30/11/09)
Copenhagen summit: Is there any real chance of averting the climate crisis? Observer, James Hansen (29/11/09)
A heated debate Economist (26/11/09)
Getting warmer Economist (3/12/09)
Is it worth it? Economist (3/12/09)
Good policy, and bad Economist (3/12/09)
The Carbon Economy Economist (3/12/09)
Copenhagen climate summit: 50/50 chance of stopping catastrophe, Lord Stern says Telegraph (1/12/09)
UK Economist: Climate Skeptics are Confused U.S.News, Meera Selva (1/12/09)
Growing Scientific Consensus on Climate Change Ahead of Copenhagen Conference Voice of America, Michael Bowman (1/12/09)
EU ‘should cut emissions by 30%’ BBC News, Roger Harrabin (1/12/09)
Stern says Copenhagen could still save world Environmental Data Interactive Exchange (1/12/09)
Moves by U.S., China induce India to do its bit on climate Washington Post, Rama Lakshmi (2/12/09)
Why do climate deniers hold sway in Australia? Guardian, Fred Pearce (1/12/09)
Australian Senate defeats carbon trading bill Guardian, Toni O’Loughlin (2/12/09)
Failed CPRS ‘may lead to better plan’ Sydney Morning Herald (2/12/09)
Australia carbon laws fail, election possible Reuters, Rob Taylor (2/12/09)
Australian Senate rejects Kevin Rudd’s climate plan BBC News (2/12/09)
The following is the official conference site:
United Nations Climate Change Conference Dec 7–Dec 18 2009
Questions
- Why cannot tackling global warming be left totally to the market?
- To what extent can the market provide part of the solution to global warming?
- How can a cap-and-trade system (i.e. tradable permits) be used to achieve (a) emissions reductions; (b) an efficient way of achieving such reductions?
- Why could the atmosphere be described as a ‘global commons’? Does it have either or both of the features of non-excludability and non-rivalry (which are both features of a public good)?
- To what extent are climate change talks a prisoner’s dilemma game? How may the Nash equilibrium of no deal, or an unenforceable deal, be avoided?
No-one in the UK can have failed to notice the seemingly never-ending torrent of wind and rain that has swept the country over the past couple of weeks. At the moment, there are 19 flood warnings in the UK and a further 58 areas are on flood watch, according to the Environmental Agency. Cockermouth in Cumbria has been the worse hit, with 12.4 inches of rain falling in just 24 hours, 6 bridges collapsing and over 200 people being rescued by emergency services, some having to break through their roof to get out. Thousands of people have been evacuated; PC Bill Barker lost his life trying to save others; and fears remain for a 21-year old women, who was washed away from a bridge. This has led to a safety review of all 1800 bridges in Cumbria.
Thousands of people have lost their homes and belongings and over 1000 claims to insurance companies have already been made. Flood victims are facing rapidly rising costs, as insurance premiums increase to cover the costs of flooding and this has led to these houses becoming increasingly difficult to sell. Some home-owners are even being forced to pay mandatory flood insurance. Without this in place, insurance companies are not willing to insure homeowners in some areas, or the premiums they’re charging are simply unaffordable. After all, if one household in an area hit by flooding claims for flood damage, the probability of all other houses in that area also claiming is pretty high, if not an almost certainty.
Care packages are arriving for those hit by the floods, as food is starting to run out, and estimates of the costs of flooding have already reached ‘tens of millions of pounds’. Gordon Brown has pledged £1 million to help the affected areas, but who knows where this money will come from; Barclays has also pledged help for the small businesses affected.
An independent inquiry needs to be launched into the causes of this flooding and whether better flood protection should have been in place. However, the extent of the flooding experienced is argued to only happen every 300 years, so is the cost of flood protection really worth the benefits it will bring? A number of issues have arisen from this freak weather, and some are considered in the articles below.
Residents returning to Cockermouth after flooding (including video) BBC News (23/11/09)
Insurers will be hit by £100 million flood bill City AM, Lora Coventry (23/11/09)
£100 million bill after Cumbria floods nightmare Metro, Kirststeen Patterson (23/11/09)
Floods claim in Cumbria could and Scotland could top £100 million (including video) BBC news (22/11/09)
Riverside residents, others may be forced to buy mandatory flood insurance The Times, Illinois, Steve Stout (21/11/09)
Funds for flooding victims set up BBC News (22/11/09)
Flood victims suffer as insurance costs rise Guardian, Jamie Elliott (8/11/09)
1 in 6 house insurance customers at risk of flooding UIA (20/11/09)
Papers focus on flood shortages BBC News (23/11/09)
Questions
- Why are insurance premiums high for flood protection and how will this affect house sales in the affected areas?
- Are the risks of flooding independent?
- Apart from those living in the areas hit by floods, who else will suffer from the flooding and how?
- The flooding experienced is said to be a phenomenon experienced every 300 years. Should better flood defences be put into place to stop the same thing happening in the future or should we use the necessary money elsewhere?
- What are the private and external costs and benefits of increased flood defences? What would a cost–benefit analysis need to establish in order for a decision to be made over whether more defences should be put in place?
- Millions of pounds will be needed to repair the damage caused by the flooding. Where will this money come from? Think about the opportunity cost.
- What do you think will be the likely impact on environmental policy and how will this affect you?
