Sustainability | Economics in Plain English - Part 2

Archive for the 'Sustainability' Category

Feb 24 2009

Market Failure and the role of government in the economy ~ an introduction to Environmental Economics

Economics is the field of study that attempts to address the basic problem faced by society relating to the environment and natural resources: the problem of scarcity in a world of infinite wants. Many, if not all, of our planet’s environmental woes are attributable to an economic phenomenon known as market failure. A market failure results whenever too much (or in some cases too little) of a good or service is produced and consumed by the economy.

What does this have to do with the environment? The connection lies in the reality that everything we produce and consume (and I mean everything!) originates from the earth. Nothing can be made by the sweat of man alone; in fact, three resources are required to produce any good or service: labor, capital (i.e. tools), and land. Sometimes weE-waste think of the resource of land as gifts of nature. However, in a world where environmental threats like those mentioned above are staring us in the face, it is becoming more and more obvious that the natural resources we’ve exploited for so long may not, in fact, have been gifts from Mother Nature at all, and their overuse may impose significant and unaccounted for costs on society AND the environment.

But let’s be honest, consuming is fun! Nothing is more gratifying than scoring a fantastic deal at your favorite boutique, walking out of a fast food joint with a plastic bag full of tasty treats for super cheap, and getting your hands on the latest high tech gizmos as soon as they’re launched (and dumping that old technology out so you’re not the lame one with the three pound cell phone!) However, the true cost of our obsessive consumption habit is not always represented by the price we pay for our fast food, our blue jeans, and our iPads.

In reality, the prices we pay for our goods and services are far lower than they should be; and the quantity of these things we consume is far higher than it should be. How do we know this? Look around. The very environmental issues with which environmental groups are most concerned can be traced back to the consumer behavior we enjoy partaking in so much. We’re conditioned to buying what we want, when we want it, and for a price that places little burden on our pocket books.

What we don’t realize, however, is that nature is bearing the burden of our high levels of consumption. In its attempt to absorb the pollutants that are emitted in the manufacture of our products, the waste that’s created from the disposal of our products, and the destruction that’s left behind from the extraction of the natural resources that go into our products, Mother Nature is more than ever choking on the waste created by our economic behavior. The costs born by nature are not accounted for in the production costs faced by firms, nor in the prices paid by consumers. These costs are externalized, or passed on for others to worry about.

The problem is, these days the bill has come due, and the environment is calling in its debts. Humans must now face up to the failures of its markets, and internalize the costs that for so long have been passed on to the environment and society, which suffers from the effects of environmental degradation.

The reality that we’ve used too many natural resources to produce too much stuff for too long is evidenced by simple examination of the natural world around us. Or, in the case of China, the complete lack of a natural world around us. From the pollution filled skies, to the waste clogged waterways, to the traffic jammed highways, China is a case study in market failure. The world, now used to the cheap imports China is so good at pumping out, does not consider the impact that the manufacture and consumption of such a massive variety of cheap products is having on China’s, and these days the world’s, environment.

In the following audio clips, you’ll hear three short stories about how the over-exploitation of resources is causing harm to human welfare and the environment. Each of these stories contains a market failure, usually in the form of a negative externality, or the production and consumption of certain goods creating spillover costs on somebody or something not involved in its production or consumption. See if you can identified who’s being harmed, and who’s at fault:

Story #1: “Where does all that E-waste go?” from Public Radio International’s “The World: Technology” podcast

Story #2: “Trash Island” from WBEZ Chicago’s “This American Life”

Story #3: “Nauru – the island in the middle of nowhere” from WBEZ Chicago’s “This American Life”

After listening to these stories, reflect for a moment on the true cost of the environmental and human tragedies of which they told. What role does our consumer culture play in these tragedies? What could have been done to prevent the conditions in those E-waste markets in Africa and China, the islands of garbage floating in our deep oceans, and the complete destruction of an island paradise 1,100 miles from the nearest land? Is there anyone to blame? Should we blame our politicians, our leaders? The answer to these questions is: there’s no easy answer, unless we want to get really personal here and point to humans’ own flawed nature: the fact that we are motivated primarily by greed and self-interest.

If that’s true, then perhaps hope for the environment can only be found in the responsible hands of benevolent governments, who once and for all take steps to mitigate the destructive impacts of our endless patterns of production and consumption. In fact, it is often government which is needed to intervene and correct market failures like those in the stories.

Three tools have emerged for governments wishing to correct such negative externalities. These involve three fundamentally different approaches, some more effective than others. One involves direct government control. This is when governments intervene in a market in which negative externalities exist and try to make producers clean up their acts. They threaten producers with penalties and fines, and monitor industries to try and force firms to manufacture their products in a clean, efficient way. (this is like what the Europeans are doing to minimize their e-waste).

The next option also involves a large roll for the government: corrective taxes. Businesses that produce goods that end up polluting the environment (either through their production or consumption) can be taxed based on the amount of pollution they create. If creating more pollution means paying more taxes, the companies will find ways to produce in a more environmentally responsible manner, in order to keep their costs low and to maximize their profits.

The third method for externality reduction is also the most recently adopted. A market for pollution permits is set up, where a government actually gives all the companies in a polluting industry permits that allow them to pollute a certain amount. WHAT? The government’s allowing firms to pollute? Well, yes. The fact is, they’re going to do it anyway, they HAVE to in order to produce anything! The benefit of this system is that the government will only give each firm so many permits, and they’re not allowed to pollute beyond what their permits allow, UNLESS they go and buy more permits from producers that don’t need all theirs. This way, firms have an incentive to pollute less, because any permits they don’t use they can sell to other producers and make profits on those sales! Dirty firms have to buy more and more permits, clean firms get to sell those they don’t need… can you see where this is going? ALL FIRMS want to become clean firms in this scenario!

Nauru - a paradise lost

The three methods introduced above are being used to different degrees by different countries in various industries to try and mitigate the negative effects of some types of pollution and greenhouse gas emissions. Unfortunately, not nearly enough is yet being done, especially by some of the worlds largest economies (and thus, polluters), namely the United States, China, and India.

If our world is to avoid a fate like that of the tiny island of Nauru, where every last resource was exploited to the point where the island could no longer sustain life, then more must be done to reduce the spillover costs that accompany the production and consumption of so many of our precious goods.

I tell my econ students a story about how one day hundreds of years ago some smart guy decided to start calling products (you know, the stuff we consume), GOODS. From that day on humans would always associate consumption with something GOOD. Today, in an era where the goodness of consumption is offset by the evil of environmental destruction, more than a strong government hand is needed. Conservation and appreciation for the gifts of nature, not insofar as they can be exploited by industry, but left intact for the appreciation and welfare of society, both today’s generation and that of our grandchildren, must be fostered and encouraged among global citizens young and old.

Hopefully, this article and the stories you heard here will help you understand a little more about the economics of the environment, and help you become more educated about what can and should be done to correct the market failures that have led to the dire challenges faced by our world today.

A great website on environmental economics written by two economists WAY smarter than Mr. Welker can be found here: http://www.env-econ.net/

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Oct 05 2008

Where I’ll be this week: Economic development experiential learning trip to Egypt

Mediterranean Center for Sustainable Development – Collaborative School Programs

One of the great joys of teaching at an international school is the opportunity for travel. Not only during breaks and summer vacations, but also with students through programs such as Zurich International School’s kids planning in a circleClassroom Without Walls.

My colleague and fellow Economics teacher (and blogger!) Joe Hauet decided last spring to organize an economics research and experiential learning trip to a sustainable living community on the banks of Egypt’s Nile River, near the city of Beni Suef, two hours south of Cairo. 40 ZIS Economics students, mostly year 2 IB students, will spend the coming week learning about economic development from experts in the field who are part of the Mediteranian Center for Sustainable Development Programs. The students, Joe and myself will spend three days at the Nile delta’s Kan Yama Kan village, followed by two days exploring the ancient Egyptian sites at Giza and around Cairo:

When teachers bring their students to Kan Yama Kan Village and engage them in our programs, they know we take a holistic approach to learning. Students learn about the environment through hands-on activities designed to provoke critical thinking and follow-up discussion in the classroom. They are exposed to sustainable development concepts and practices that are simple, easy to comprehend and replicable. Educating youth about the environment and developing their character leads to an informed citizenry with the capacity to reach the Millenium Development Goals

Our programming is proactive and flexible. We recognize that youth today face social and global challenges in a fast-paced world and we believe that as educators it is our responsibility to help them gain the intellectual and life skills they need to succeed. We do this by exposing students to practical learning experiences and modeling the behavior and values we teach; we use issues that arise while living in a community as learning opportunities about respect for others, good governance, human rights, and personal and collective responsibility.

Each visit to Kan Yama Kan is unique. Each program is tailored to the needs of the teachers, students or group. Whether the program kids doing soil experimentsfocuses on biodiversity, animal behavior, renewable resources and searching for fossils or planning and building a habitat for tortoises, scripting a drama performance or revision for end of year exams, MCSDP works closely with faculty and school administrators to understand their objectives and meet their expectations.

The goal of the ZIS Classroom Without Walls trip to Egypt is to allow IB Economics students to experience the challenges faced by communities in developing countries, as well as to gain a deeper understanding of the development strategies rooted in sustainability that are going on around the Mediteranean region.

I owe a huge thanks to Joe Hauet, whose dedication and work in planning this trip over the last six months will truly pay off for the 40 students and four teachers leaving for Egypt bright and early tomorrow morning.

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Jan 10 2008

Does the funeral industry represent a market failure?

‘Green funerals’ feature biodegradable coffins – CNN.comMove over, I got a coffin on my back!

Our final micro unit examines situations in which resources are either under or over-allocated towards the production of certain products. Such a scenario is known as a “market failure” and in some case is represented by the existence of negative externalities, or spillover costs born by society, the environment, other species, or any third party that was not part of the market transaction.

All this is a fancy way to say that someone or something gets screwed thanks to someone else’s actions. In the case of negative externalities, such as air-pollution, second-hand smoke, loss of biodiversity that results from over-grazing or over-farming of sensitive lands, or even global warming, the full costs of production or consumption of particular goods are not being born solely by the producers and consumers of those goods.

The article above talks about the funeral industry, which for decades had had incalculable impacts on the natural environment thanks to humans’ irrational desire to be preserved for eternity with the help of countless chemicals, air-tight metal lined coffins, and heavy use of pesticides, herbicided, and all kinds of “icides” to make sure that our place of rest remains sterile and lifeless for perpetuity. All this “preservation” takes a huge toll on the environment, and as a result of America’s newfound sense of “greenness”, alternative forms of burial have emerged:

“It is composting at its best,” said Beal, owner of The Natural Burial Company, which will sell a variety of eco-friendly burial products when it opens in January, including the Ecopod, a kayak-shaped coffin made out of recycled newspapers.

Biodegradable coffins are part of a larger trend toward “natural” burials, which require no formaldehyde embalming, cement vaults, chemical lawn treatments or laminated caskets. Advocates say such burials are less damaging to the environment.

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Aug 20 2007

IB: Economic development and fertility rates in India

How the World Works: Who Invented Calculus? – Salon.com

IB students, here’s a blog post you’ll want to read closely once we start studying economic development later this semester. Andrew Leonard at Salon.com refers to a study titled “Does Economic Growth Reduce Fertility? Rural India 1971-1999”.

Interesting stuff. Leonard points out a peculiar paradox of growth in India:

India’s Green Revolution has been criticized by those who wonder if an agricultural model reliant on large inputs of fertilizers and pesticides is environmentally sustainable over the long run. But if in the short run these spikes in agricultural productivity contribute to population stabilization, then we have a nifty paradox: a (possibly) unsustainable agricultural model contributing to (possibly) sustainable population levels.

This article and the study it refers to might make for an interesting commentary for your internal assessment, or as a source for an extended essay on growth and development. Any opinions on the supposed correlation between economic growth and decreased fertility?

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Jul 04 2007

2,250 Sandpoints = 1 Shanghai

Sandpoint Skyline

One week ago I left Shanghai behind and my wife and I began our annual migration back to our summer stomping grounds, the Pacific Northwest. After 10 months living and working in a city of 18 million people with an industrial sector that ensures 365 days a year of a thick haze blank over the Shanghai, nothing is more refreshing than returning to the nearly empty mountains of North Idaho (“It’s a state of mind” is what they say around here).

Some of the highlights of life in Northern Idaho include the excessively blue skies, the sparkling Lake Pend O’reille, the ever green slopes of the Selkirk mountains, the bears, moose and deer with whom we share our beautiful trails, and finally the intimate sense of community that infuses the local economy of Sandpoint, our home town of 8,000 (you’d need 2,250 Sandpoints to make one Shanghai!).

In Shanghai, foreigners mostly shop at one or two boutique foreign grocery stores, packed full of processed foods imported from Europe, North America, Japan, Australia and other far corners of the earth. About the only things you’ll find that are “local” in these markets is the produce, which itself is of suspect quality given the large quantities of chemicals banned in most western countries used by Chinese farmers (not to mention the continued use of human feces as a fertilizer).

To eat like a foreigner in Shanghai is to be an active participant in the global, industrial food chain. The manufacture of the processed foods imported from the West involved industrial processes far beyond the comprehension of most consumers. The use of petro-chemicals infuses every step of this process, from the chemical fertilizers, herbicides, fungicides, pesticides and insecticides to the chemical preservatives to the petroleum burned getting the food from field to factory to warehouse to container ship to grocery store thousands of miles away. To eat like a foreigner in Shanghai is to contribute to the degradation of our environment, the warming of our atmosphere, and the destruction of a traditional way of life for local family farmers all over the West, as factory farms proliferate across the West’s fertile lands. Despite all this, my wife and I still eat like foreigners in Shanghai, and attempt to suspend our conscience while we participate in the industrial food chain we so despise.

For my wife, Liz, and I, returning to Sandpoint, Idaho is an act not only of spiritual and physical rejuvenation, but also of economic emancipation. We are freed from the destructive global industrial food chain on which we depend as foreigners living in China. To eat in Sandpoint is to participate in a sustainable, local, environmentally friendly food chain where organic, locally grown foods are available in every grocery store.

Our first stop when returning to Sandpoint is always Winter Ridge Organics, followed by a trip to Woods Ranch Meat Processing Plant (for me, as my wife is a vegetarian). Woods Ranch presents an interesting study in local foods. All of the meat processed at this small plant nestled in between Idaho’s Selkirk Mountains and the Cabinet Mountains of Western Montana is raised in the rich grasslands of the Pack and Kootenai river valleys. In addition to grass fed beef, this plant processes and sells direct to the consumer pork, buffalo, and game meat such as elk and venison. During the hunting seasons it is not unusual to find bear and moose in their freezers, as the region’s mountains present local hunters with a plethora of wild game.

Shanghai Skyline

When I compare the intricate and energy intensive food chain of the foreign eater in Shanghai with the short, direct food chain of the local eater in Sandpoint (along the dirt road to Woods Ranch you pass the very cattle that are processed therein), I begin to wonder how our economy has woven such a tangled web of international trade and commerce. I am also thankful that I am in a position where I get to observe and participate in both extremes of the modern economy, both the local and the global. As a teacher of economics, this perspective may prove valuable as my students and I strive to put the complex web of today’s economy into focus.

Ultimately, I can say I wish I could have the best of both worlds. I wish I could take my wonderful job and school and classroom and students of my life in Shanghai and “import” them all to Sandpoint, Idaho. I wish we could all enjoy a more l

ocal existence; but the prospects of this way of life surviving seem weaker every year I return. A couple of summers ago the town just north of Sandpoint opened the first Wal-Mart in Northern Idaho. Reality check: globalization is everywhere! China haunts my idyllic summer paradise; I cannot escape it! At least the haze of Shanghai has not stretched its ugly reach to the Selkirk mountains, not yet, at least…

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