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Economics 309 – The Economics of a
Sustainable Society This is a take-home examination, and in turning in this exam with your name on it you are pledging that ALL of the answers you have provided represent your own work, and thus you have not collaborated with any other students. Violating this pledge constitutes academic dishonesty. According to the HSU Catalog 1999-2000, pp. 361-62: "Academic dishonesty is willful and intentional fraud and deception to improve a grade or obtain course credit. It includes all student behavior intended to gain unearned academic advantage by fraudulent and/or deceptive means…. Cheating includes, but is not limited to … working together on a take-home test or homework when not specifically permitted by the instructor." … At faculty discretion, cheating may result in an "F" grade on the assignment or examination in the course." NAME: ANSWER KEY (special thanks to Michelle Smith for providing these answers from her exam)
Please provide the very best answer you can to each question below. Word-process your answers and attach them to this question sheet with your name written clearly above. Part I: Computational Analysis and Interpretation (25 Points/2 Questions = 12.5 Points Each) $ Cost Savings from Installing Thermal Curtains:
Note: In year 0 you can purchase thermal curtains for $2000. Thermal curtains reduce energy loss through windows, as shown in the table above. To keep the problem simple I have limited the time horizon to five years. Without discounting the thermal curtains pay for themselves over the five year period. 1. Determine whether the present discounted value of energy cost savings from the thermal curtains are sufficient to pay for the additional $2000 in up-front cost under each of the discount rates shown below: a. r = 2 percent b. r = 5 percent c. r = 10 percent d. r = 20 percent
2. In what way does this discounting problem serve as a metaphor for the relationship between discount rates and sustainability? Briefly but succinctly explain the extent to which high discount rates, perhaps generated by the (risk-adjusted) opportunity cost of capital in equity markets, are consistent with investing in restoring natural capital for the benefits of future generations. This problem is a good example of what occurs when people look to invest in things that are on the line of sustainability. Whether or not a decision is made is often based upon the comparison of future cost savings versus the initial investment. If the money could be invested elsewhere and receive a higher rate of return than that which is generated by the investment in the sustainable alternative, it is considered financially unfeasible. As you can see with this example, at a high discount rate the initial investment is not paid back within five years of making the investment. Although using the social rate of time preference does allow for current investments that work to increase stocks of natural capital for future generations, high discount rates are not consistent with the idea of sustainability. As shown in the previous section, high discount rates discourage any investment which would bring such future returns.
Part II. (75 Points/5 Questions=15 Points Each): Your grade on these questions will reflect the quality and completeness of your analysis, research, arguments, and writing style. Read the question carefully, and be sure to respond to each part of a given question. Strive to be objective. Answer each of the questions below (each is worth 15 points; clearly indicate which question you are answering): 1. Do some research and summarize one or more published articles or books (not including your textbook) that describe sustainability as an ethic. Briefly but succinctly describe the key elements of sustainability as an ethic. E.F. Schumacher, in his book "Small Is Beautiful" does not directly address the issue of sustainability in the term, but uses instead his entire book to hold that description. By Schumacher’s standards, anything that is small, simple, non-violent against nature, and efficient would fall under the precepts of sustainability. As stated before, nowhere in his book does he actually use the term "sustainable" in the sense which we currently use it, but it’s meaning is found throughout the text. In chapter 4, "Buddhist Economics" he states "the aim should be to obtain the maximum of well-being with the minimum of consumption." (Pg. 61), this idea is central to the idea of sustainability. What sustainability works towards is obtaining the greatest amount of happiness for all organisms (not just humans) with the minimum of consumption. Consumption should be a means to an end instead of simply an end in itself, as it is so often seen to be today. It should work to enrich both our current existence as well as the existence of those in the future.
2. Consider the WTO appellate body report regarding U.S. restrictions on importing shrimp from countries that do not use turtle excluding devices (http://www.wto.org/wto/dispute/distab.htm). (a) Based on that decision, what must countries such as the U.S. do if they wish to force other countries (particularly lower-income countries) to use the same environmentally friendly technologies required of domestic U.S. producers? Be sure to carefully site paragraph numbers and quote from the appellate decision where relevant. (b) Is it possible to make positive progress toward sustainability and to preserve natural capital under current WTO trade rules? If so, then why? If not, what specific changes need to be made in the WTO trade rules? There are a number of things that are required by the WTO in cases concerning internationally scoped regulations, such as the regulations regarding the use of TEDs on shrimp trawlers. One requirement is that the country desiring to implement such policy works with the other countries that would be affected by it. In paragraph 161 it reads "the failure of the United States to engage the appellees, as well as other Members exporting shrimp to the United States, in serious, across-the-board negotiations with the objective of concluding bilateral or multilateral agreements for the protection and conservation of sea turtles, before enforcing the import prohibition against the shrimp exports of those other Members." This finding is used to illustrate the issue of discrimination, in that they negotiated with some countries but not others. Another requirement of the WTO is that the restricting countries work towards the transfer of necessary technology to the other countries. This strongly applies to the case of lower income countries. Paragraph 175 directly relates to this issue "Differing treatment of different countries desiring certification is also observable in the differences in the levels of effort made by the United States in transferring the required TED technology to specific countries. Far greater efforts to transfer that technology successfully were made to certain exporting countries … than to other exporting countries, including the appellees." It implies that if the necessary technologies had been successfully transferred, or more actively attempted to be transferred, in all likelihood the case against the US regulations would either not have occurred or would not have been found against the US. b) Whether it is possible to make progress towards sustainability and to preserve natural capital under current WTO trade rules is questionable. The ruling against the US with regards to the shrimp import ban as well as other cases, such as the case against the US with regards to US standards on imported gasoline, would lead to the impression that such progress is not actually possible. But at the same time, the reasons for filing against the US with regards to the ban are not completely unsubstantiated. If we are working to develop a global perspective with regards to environmental standards and sustainability, it only stands to reason that all countries that would be affected deserve to participate in such decisions. The same holds for the facts surrounding the transfer of necessary technology to comply with such restrictions. Countries defined as high income, are in many ways obligated to transfer their knowledge to countries without the same knowledge. This does not mean that we are obligated to simply give them the needed technology, but instead to enable them to produce their own technology and equipment. I do not have enough experience in interpreting the WTO rules to make clear statements regarding the direction in which changes should be made. That countries should be able to make regulations regarding environmental regulations is definite, but the way in which they should be interpreted with regards to international trade is in question. If all regulations are allowed it would be impossible to level the playing field in the long term, but if we continue to always interpret such environmental regulations with regard to the lowest common denominator, we will be unable to progress towards the ideals of sustainability.
3. (a) What are the problems (both direct and indirect) associated with sustainability and human population (levels and growth rates)? Relate your answer to the five capitals of sustainability discussed in class. (b) What social, economic, and other factors are most strongly associated with declining fertility rates? (c) What are some examples of specific policies that have successfully reduced fertility rates without coercion? The problems of population and sustainability vary with regards to the specific type of capital that you look at. With regards to social capital, you could generally expect a decline in social capital with an increase in population. This is due to a higher density of individuals. It is possible that more individuals would be investing in social capital, but with an increase of population, there would a higher demand for the benefits of such capital, such as charity. Social capital is also the ability of a community to resolve conflicts: as populations rise it is harder to resolve conflicts within the community, instead needing to rely on outside authorities, such as the judicial system, to resolve them for you. With regards to human capital, an increase in population could show an increase in such capital as there are a larger number of individuals contributing to the potentials of the community, in areas such as creativity and new ideas. While there would be the potential to increase in human capital the quality of such capital could also show a marked decrease as the availability of resources to exploit such capital would be stressed by the large number of individuals attempting to utilize it. Constructed capital would also be stressed by an increase in population. If large numbers of people were attempting to reap the benefits of constructed capital, there would be less on an individual basis. The value added to goods by services would decrease because of the larger number of people available to provide such services. A large population would also require that the focus of production be more on goods which are necessary for simple survival and less on goods which provide added enjoyment to the lives of those individuals. Cultural capital is influenced by the individuals within a community. As we see the population of even the United States grow we see a decrease in such capital. People need to move further away from their families in search of their direction and therefore often loose those links that provides them with their foundation of cultural capital. Natural capital is most strongly affected by increases in population. With an ever-larger population, we see an increased exploitation of such sources of capital. All other forms of capital are based on natural capital. Without it, no other form could exist for it is the store from which we draw all of the components necessary for them. Current population levels offer support for these ideas. High growth rates compound all of these problems, as well as many that I am sure that I have not touched on, in that they cause these pressures to occur much more quickly than they would occur even with high population levels and low growth rates. High growth rates mean that people are being added to the population exponentially quicker, with little if any time for society to develop a method by which to compensate. We currently see such effects, if not here in the US then elsewhere around the globe. Sustainability works to restore these forms of capital and reaffirm their basis in society. While it might seem that the current focus is solely on natural capital, it is more likely an impetus for us to pursue the strengthening of all five forms of capital. b) The factors most strongly associated with declining fertility rates include the demographic transition, where people are shifting from more traditional forms of survival, such as hunting and gathering, or even farming, into a more trade based form of society. This causes a decline in fertility rates because children come to be seen as more of a burden and less of an asset, economically speaking, of course. This is also the case if children are seen to survive into adulthood. In many cases where children are a form of labor and social security, it is necessary to have many children, especially if you generally expect for half or more of them to die before maturity. On the other hand, once societies realize that all of their children are going to survive they will stop at the desired number instead of overestimating. Another factor that influences declining fertility rates is the empowerment of women. When women are allowed to make choices about their own fertility they often choose to have fewer children than without the choice. This empowerment includes educating women so that they have higher self worth and more ambition for the future. It also includes providing accessible methods of birth control, especially forms other than simply the condom, which relies entirely upon men’s compliance. In the higher income countries of today these transitions occurred with the industrial revolution, leading many to believe that our population problems would be solved by industrializing the world. What many of these people forget is the long path that we traveled to get where we are today. If we simply say that other countries should just be encouraged to industrialize and that that will solve all of our problems we voyage even further from the path of sustainability and doom others to unnecessarily repeat the mistakes which we have already learned from. By doing this we leave our children even further in the environmental hole, with an even slimmer chance of success. c) Specific examples of policies that have successfully reduced fertility rates without coercion include providing family planning and contraceptives to people whom want them. Many countries have seen a sharp decline in fertility rates from this fact alone. These countries include South Korea, where fertility rates have dropped from approximately six in 1960 to 1.7 in 1998 (Scientific American, 1/00, pg. 91). Similar programs have been implemented in other countries with similar results including in Bangladesh where fertility rates have dropped to 3.3 as contraceptive use has increased from 5% in the 1970’s to 42% today. When looking at the United States and other high income countries we see a similar drop in fertility rates in the ‘60’s as the demographic transition fully materialized along with the acknowledgement of women’s rights, illustrating two principles discussed above.
4. (a) What is ecological tax reform as defined in the textbook? (b) In what way does it move us further along the path toward a more sustainable society? (c) Using resources available on the Internet (http://www.humboldt.edu/~envecon/internet.html#tax) or elsewhere, describe two examples of actual ecological tax reform proposals or policies. a. Ecological tax reform is the shifting of taxes from desirable activities such as work, to undesirable activities, such as air pollution, or other environmentally degrading activities. b. It moves us further along the path towards a more sustainable society by encouraging positive activities while penalizing negative activities. Most businesses and individuals operate on the principle of obtaining maximum financial returns and therefore if they are taxed for negative activities they will be more likely to reduce those activities so that they can maximize profits. c. One example of ecological tax reform is discussed on the Wuppertal Website in an article titled "EEA Study Shows Effectiveness of Green Taxes" (WBE 2/96).They state that sulfur dioxide and nitrogen oxide taxes have been successful in Sweden, and water pollution taxes have been successful in the Netherlands. I must quantify this statement by stating that they do not use specific figures, but instead make blanket statements without corroborating evidence. They go on to discuss the potential barriers to ecological taxes which include the perceived impacts on competitiveness, potential conflicts with world trade rules (possibly as discussed with the TED case), as well as existing subsidies on environmentally harmful activities. Another example of ecological tax reform policies at least being considered can be found a little closer to home. The Friends of the Earth Website reports that the Oregon State Governor convened an environmental taxation subcommittee to research into environmental tax reform. They also report that the North West Environment Watch suggest that with a tax transfer Oregon could reduce business and income tax from 46% of state revenue to 14% as well as eliminate property taxes by taxing pollution, carbon, and traffic. In 1999 there were proposals to tax pesticides, develop water pollution permit fees, and legislative funding for a large- scale tax shift study.
5. How is the ecological footprint of a country determined, and in what way is it an indicator of strong-form sustainability? (One Internet resource: http://www.ecouncil.ac.cr/rio/focus/report/english/footprint/). The ecological footprint of a country is determined by calculating the amount of nature needed to provide the resources used as well as the amount of nature required to process the wastes generated by a country. The amount of nature is calculated by adding up the area, with world average productivity, needed to provide those ecological services that we consume. It also includes the amount of nature required as a carbon sink for the emissions produced by the burning of fossil fuels for each country. One way in which the ecological footprint is an indicator of strong form sustainability is that it focuses on the individual carrying capacity of each nation. The final computation tells us whether each country meets or exceeds (also in some cases falls below) the carrying capacity of that specific country. While most indicators like to use some variance of GDP, the ecological footprint does not use GDP in it’s calculations, instead assessing whether a country is drawing down on it’s (or other’s) stocks of natural capital in order to meet the current needs of it’s society.
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