Category: Economics for Business: Ch 22

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Crunch time for ecology as well as economics?

“The economic crisis is petty by comparison to the nature crunch. But they have the same cause.” This is how George Monbiot starts his article below. The comparison between the financial crisis may seem an unlikely one, but global warming and the resultant economic costs could also have a significant effect on the world economy.

This is what denial does Monbiot.com (14/10/08)
Green shoots of recovery Guardian (8/10/08)
Independence from the street up Guardian (23/9/08)

Questions

1. Define the terms (i) external cost (ii) private cost (iii) social costs.
2. Using diagrams as appropriate show the reasons why the market economy may fail to allocate scarce resources appropriately.
3. “If the global economy keeps growing at 3% a year (or 1700% a century) it too will hit the wall.”. Discuss possible policies that may help prevent this situation arising.
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Nationalisation, but not as we know it?

Nationalisation has been seen by most people as something very much of the past. However, the financial crisis has changed all that and the recent nationalisation of banks in Iceland and part-nationalisation of UK banks has brought the concept under the economic microscope once again.

Iceland struggles for control as it nationalises Kaupthing Times Online (10/10/08)
Brown and Darling have bitten the bullet – and set the world an example Guardian (9/10/08)
G7 ministers forced to think the unthinkable Guardian (11/10/08)

Questions

1. Define the term ‘nationalsation’.
2. Assess why the Icelandic government felt that the nationalisation of Kaupthing was the best solution to their financial situation.
3. Discuss the extent to which other countries may be obliged to nationalise their banks.
4. Discuss whether the current tranche of nationalisation is likely to be extended beyond the finance industry.
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Economic downturn – prime crime-time?

The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?

Consumed by crime Guardian (24/9/08)

Questions

1. Explain why an economic downturn may lead to increased levels of crime.
2. Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth.
3. Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth.
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The cost of dead PCs

A significant illegal trade in ‘e-waste’ has developed with thousands of discarded computers arriving every day in the ports of West Africa. Once there, children are often used to dismantle them and extract metals . However, this has resulted in huge toxic dumps and serious health problems for resident in the surrounding area.

Breeding toxins from dead PCs Guardian (6/5/08)

Questions

1. Identify the principal external costs resulting from this illegal trade in e-waste.
2. Using diagrams as appropriate, show the impact of this market failure on the market for new computers.
3. Evaluate two policies that the international community could adopt to reduce this illegal trade in e-waste.
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Guzzling gas just got more expensive

One of the key Budget measures was a change in the car tax regime. The Chancellor, Alistair Darling, introduced a new banded system annual vehicle excise duty (VED) based on the level of emissions of the vehicle. The cars with the lowest levels of emissions will be exempt from VED, but at the other end of the spectrum, the highest polluting vehicles will face an annual VED of around £440. However, this will be substantially higher in the year of purchase of the vehicle and this so-called ‘showroom tax’ will raise the tax level to £950 in the first year of purchase.


Gas guzzlers hit with higher taxes Guardian (12/03/08)
New taxes on gas-guzzlers will raise an extra £1.2bn Guardian (13/03/08)
Spared at the pumps – but hit in the showroom Guardian (16/03/08)
Q&A: Showroom tax BBC News Online (12/03/08)
Gas guzzlers set to face £950 tax BBC News Online (12/03/08)

Questions

1. Explain how the highest polluting vehicles affect the socially optimal equilibrium in the market for car travel.
2. Using supply and demand diagrams as appropriate, illustrate the likely impact of the new car tax regime in 2009-10 on the equilibrium in the market for car travel. What is the significance of the concepts of price elasticity of demand and consumer surplus in your analysis?
3. Discuss the likely effectiveness of the new banded car tax regime at reducing the average level of emissions from cars. Would raising the tax on petrol and diesel be a more efficient method of achieving the same goal?