Transcript 1. Aggregate demand and supply

If it's Good for the Environment,
is it Bad for the Economy?
AS
AQA
Edexcel
OCR
1 Markets and market failure
Markets – how they work
The market system
2 The national economy
Markets – why they fail
Market failure and
government intervention
3 Markets at work
Managing the economy
The national and
international economy
A2
AQA
1 Working as an economist
2
Business economics and
the distribution of income
Government policy, the
3 national and international
economies
Edexcel
OCR
Two from
a. Economics of work
and leisure
b. Transport economics
a. Labour economics: or
c. Economics of
Development
b. Development economics
d. The UK economy
Industrial economics
The UK in the global
economy
Economics in a European
context
“Climate change - everyone's business”
Report of the CBI Climate Change Task Force
"This report makes clear that in the future, business
needs to be green to grow,“ said the CBI's director
general, Richard Lambert. “To manage their costs and to
maintain the trust of their customers, they will need to
build carbon management into their corporate DNA.”
Business has already made significant progress in
responding to the climate change agenda. It is well
placed to make an early and decisive contribution to
finding and implementing solutions to the challenge of
climate change.
 Priorities

Incorporate climate change policies into its DNA.
Consumer demand will stimulate competition to produce
greener alternatives to current products and services, and
reward those businesses that take a lead. In the low
carbon future, companies will have to be green to grow.

Redouble efforts to improve energy efficiency, by
focusing on areas such as transport and buildings.

Work with employees and the supply chain to reduce
emissions, and adapt the current workplace to cope with
the climatic and other changes that are already likely as a
result of past CO2 emissions.

Measure its carbon footprint, and develop reporting
systems to benchmark performance.

Provide consumers with the reliable communications and
product developments they will require.
The
Environmental
Problem
The environmental problem
Use
of the environment as:

an amenity

a source of primary products

a dump for waste
The economy and the environment
Labour
Goods and services
Resources
Waste
Amenity value
(Clipart for the environment: e.g. countryside scene)
The environmental problem
Use
of the environment as:

an amenity

a source of primary products

a dump for waste
Conflicts
between these uses

productive resource v. amenity value

dump for waste v. amenity value

dump for waste v. productive resource
The environmental problem
Population
pressure / limited resources
Problem of diminishing returns
 Absorptive capacity of
environment
 Accelerated degradation

Accelerating environmental damage
Environmental damage
Total
damage
O
W1
Waste
The environmental problem
Population
pressure / limited resources
Problem of diminishing returns
 Absorptive capacity of
environment
 Accelerated degradation

Cause

for optimism?
Increased price of non-renewables
Oil prices
$ per barrel
(Brent crude)
100
90
80
70
60
50
40
30
20
10
0
2002
2003
2004
2005
2006
2007
The environmental problem
Population
pressure / limited resources
Problem of diminishing returns
 Absorptive capacity of
environment
 Accelerated degradation

Cause
for optimism?
Increased price of non-renewables
 Technological developments
 Public opinion
 Green business
 Government attitudes/action
 BUT growing damage

The OECD environmental 'traffic lights'
PRESSURES
ON THE
ENVIRONMENT
• Industrial point source
pollution
• Some air pollutants
(lead, CFCs, CO, SOx)
• Water use
• Toxic emissions from
industry
• Hazardous waste
generation
• Energy production and use
• Agricultural pollution
• Over-fishing
• Greenhouse gas emissions
• Motor vehicle and aviation air
pollution emissions
• Municipal waste generation
STATE OF THE
ENVIRONMENT
• Forest coverage in
OECD regions
• Surface water quality
• Forest quality in OECD
regions
• Ozone layer integrity
• Biodiversity
• Tropical forest coverage
• Fish stocks
• Groundwater quality
• Urban air quality
• Climate change
• Chemicals in the environment
RESPONSES
• ‘Green’ purchasing
• ‘Green’ agriculture
• Protected areas
• Resource efficiency
• Energy efficiency
• Biotechnology
• Forest plantations
• Aquaculture
• Energy and transport
technologies
• Waste management
Source Environmental Outlook (OECD, 2002)
Increase in car ownership
Cars per thousand population
600
Italy
Germany
500
W Germany
USA
Belgium
Sweden
400
UK
Spain
300
200
1980
1985
1990
1995
2000
Energy and Transport in Figures (EC, 2007); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
2005
An Optimum
Use of the
Environment
An optimum use of the environment
Different approaches to sustainability
The

Prices reflect scarcity of resources
The

conservationist approach
Care for environment for its own sake: importance of
sustainable development
The

social efficiency approach
Market failures: can be corrected
The

free-market approach
Gaia approach
Deep green approach:
environment has rights
Optimum level of an activity that involves pollution
MSC
Marginal
pollution
externality
Costs and benefits (£)
MSC1
S = MPC
Gaia
maximum
output
MPC1
D = MSB
Socially
Conservationist
approach
efficient
output
O
Q4
Q3
Output of good
Q2
Q1
Free-market
outcome
Market effects for green companies
Short

Often higher costs
–


term
BUT can reduce costs in some cases (e.g. reducing plastic bags)
Loss of competitive advantage
BUT changing consumer tastes
–
Fair trade movement
Ethical investment movement
–
Environmental auditing
–
Long
term

Regulations are likely to get tighter around the world

Growing stakeholder pressures around the world
–

Consumers, shareholders, employees, local communities
Competitive advantage from investment in green
technology
“Climate change - everyone's business”
Report of the CBI Climate Change Task Force
Market forces will drive big changes, but they will
not by themselves be enough to do the job. The
full range of public policies must be deployed to
create the right incentives.
Government
priorities must include

promoting an effective market price for carbon

revenue-neutral tax reform (such as changes to
business rates and council tax) to reward greener
behaviour

bigger, more focused R&D programmes to finance
new technologies and solutions until they become
commercial.
Market
Failures
Market failures
Environment as a public good
The
global ‘commons’
Features of a public good


Non-excludability
BUT rivalry
Over
use at a zero price
Externalities
External
costs from pollution
External benefits from ‘green’ activities
Problems of identifying and measuring
Ignorance
Inter-generational problems
Government
Policy towards
the Environment
Government Environment Policy
Environmental (‘green’) taxes, charges
and subsidies
Taxes
on goods and services
The optimum tax rate
A socially efficient green tax
Costs and benefits (£)
MSC
Optimum
green tax
S = MPC
P
P–t
D = MSB
Q2
O
Output of good
Q1
0
USA
UK
Sweden
Spain
Norway
1994
Weighted average
Source: based on data in Environmentally related taxes database (OECD, 2006)
Netherlands
Japan
Ireland
Greece
Germany
France
Finland
Denmark
Canada
Belgium
Austria
Australia
% of GDP
Green tax revenues as a % of GDP
5
2004
4
3
2
1
0
USA
UK
Sweden
Spain
Norway
1994
Weighted average
Source: based on data in Environmentally related taxes database (OECD, 2006)
Netherlands
Japan
Ireland
Greece
Germany
France
Finland
Denmark
Canada
Belgium
Austria
Australia
% of GDP
Green tax revenues as a % of GDP
5
2004
4
3
2
1
Government Environment Policy
Environmental (‘green’) taxes, charges
and subsidies
Taxes
on goods and services
The optimum tax rate
Subsidies
for R&D
Problems with green taxes and subsidies
Government Environment Policy
Non-market-based policies
Command-and-control
Alternative




standards
Technology-based standards
Ambient-based standards
Social impact standards
Effects

systems
on business
Advantages
Disadvantages
Voluntary agreements
Education
Government Environment Policy
Tradable permits
Permit

Credits can be traded
Market

to emit
price for permits
Efficient solution?
Use
in USA
The
EU carbon trading system
Effects
Basis

on business
for international agreements?
Quotas for emissions or use of resources
Government Environment Policy
Can we rely on governments?
Short-termism
The
The
free-rider problem
weakness of international
agreements
If it’s good for the environment, is it
bad for the economy?
Possibly, but not necessarily.
Environmental challenges offer challenges to
business and the government.
Some will gain; some will lose.
Is it another case of survival of the fittest?
Or is it survival of the greenest?
Can Britain gain a competitive advantage?
To access these slides, go to:
www.economicsnetwork.ac.uk/archive/
A-level_Dec07