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Mid-Term Examination Professor Steven Hackett Spring 1998 1. a. Suppose that an initial net cash injection
of $1,000,000 into a local community economy is created as a byproduct
of cyber-commuting technology workers choosing the community as
a home because of its desirable quality of life. If on aggregate
40 cents of each dollar spent in the community leaks out on import
purchases, what is the ultimate economic impact of that net cash
injection? SHOW YOUR WORK. Economic Impact = $1,000,000/.4 = $2.5 million 1. b. Briefly contrast import substitution v. export-base
promotion as alternative strategies for promoting local economic
development. Which strategy is more likely to be broadly consistent
with the movement toward a more sustainable local community? List
the reasons. Import substitution: Local economic development
strategy promoting (usually smaller-scale) local businesses that
produce goods and services which substitute for otherwise imported
goods and services. Reduces the rate at which local income leaks
out of the community. Export-base promotion: Local economic development
strategy promoting (usually larger-scale) businesses that produce
goods and services for export. Generates injections of income into
the local economy. While there is a role for both forms of economic
development strategy, import substitution is likely to move local
communities further along the path toward sustainability, particularly
for more remote communities. Import substitution tends to promote
smaller scale business than export-base because import substitution
is intended to serve the local community, while export-base can
exploit economies of scale in production for export sale. Export-base
promotion and "smokestack chasing" tends to lead to an
erosion of local control and democratic process, an erosion of the
local tax base bid away to attract the export-base firm, a less-diversified
local economy, and less local ownership. In this sense import substitution
tends to be more consistent with the path toward sustainability. 2. ANSWER ONE OF THE FOLLOWING TWO QUESTIONS: Briefly but succinctly describe the various ways
in which improved education and empowerment of women move us toward
a more sustainable society. Consider both direct and indirect economic
influences. Or The Brundtland Commission argued that past patterns
of international development assistance and structural adjustment
have contributed to unsustainable levels of resource harvest in
lower-income countries. Briefly but succinctly describe each element
of the explanation. Women: Direct influence: Education and empowerment
of women is a necessary step in meeting the democratic institutions
and processes requirement of a sustainable society. Indirect influences:
Ed. and empowerment give women the ability to make more family-planning
decisions on their own; Ed. and empowerment also give women greater
workplace incomes, which raises the opportunity cost of having large
families; both of these reduce fertility rates and thus put less
pressure on natural resource systems. Finally, the majority of people
living in poverty are women, and thus education and empowerment
of women works to improve the quality of their lives. Brundtland Commission: Early World Bank and
IMF lending focused on large-scale infrastructure projects. Many
of these were not financially on good standing, or the host government
was a kleptocracy, or the anticipated value of export earnings were
insufficient to generate repayment. With about half of the debt
from large private banks, the impending default crisis led to the
World Bank and IMF offering workouts through structural adjustment
programs, which required host countries to redirect their economies
to producing exports (usually raw commodities), and reducing social
and other spending on imported goods. As the world's markets flooded
with these raw commodities their prices fell, creating what the
Brundtland Commission considered pressure for unsustainable harvest
of natural resources. 3. Consider two possible ways that a renewable
but exhaustible natural resource owned by a profit-maximizing firm
can be harvested ($ figures are in millions):
3.a. Determine the present discounted value of
the resource under methods 1 and 2, and whether method 1 or 2 maximizes
the present discounted value of the resource to the firm for each
discount rate given below (note: for method 1, use the formula "$100/r",
where "r" is the discount rate; for method 2 use the formula
given in class; SHOW YOUR WORK). a. r = 2 percent Method 1: PDV = $100/.02 = $5000 Method 2: PDV = $600/(1.02) + $600/(1.02)^2 + $600/(1.02)^3 = $1,730. Method 1 generates the greater PDV of the resource
for the firm b. r = 5 percent Method 1: PDV = $100/.05 = $2000 Method 2: PDV = $600/(1.05) + $600/(1.05)^2 + $600/(1.05)^3 = $1,634. Method 1 generates the greater PDV of the resource
for the firm c. r = 10 percent Method 1: PDV = $100/.1 = $1000 Method 2: PDV = $600/(1.1) + $600/(1.1)^2 + $600/(1.1)^3 = $1,492. Method 2 generates the greater PDV of the resource
for the firm d. r = 15 percent Method 1: PDV = $100/.15 = $666.67 Method 2: PDV = $600/(1.15) + $600/(1.15)^2 + $600/(1.15)^3 = $1,370. Method 2 generates the greater PDV of the resource
for the firm 3.b. Briefly but succinctly use your findings to
describe how capitalist financial markets may be inconsistent with
sustainability as defined in this course. As the problem in 3.a illustrates, as discount
rates rise, the financial viability of sustainable resource harvest
practices declines. In fact the problem above shows that under sufficiently
high discount rates it can be financially optimal to fully deplete
rather than sustainably use the resource in question. Capitalist
financial markets may be inconsistent with the long-term perspective
(and the requirement of preservation of natural capital in strong-form
sustainability) because discount rates in such markets are based
on the opportunity cost of capital, while discount rates consistent
with even weak-form sustainability are based on the social rate
of time preference (itself comprised of growth discounting and the
pure rate of time preference). There is no reason to suppose that
the opportunity cost of capital will be equal to the social rate
of time preference. In particular, the opportunity cost of capital
is likely to exceed the social rate of time preference because the
latter is most defensibly based on real productivity growth, which
in high-income countries has tended around 1-3 percent. Moreover,
strong-form sustainability does not even allow for this growth-based
discounting, and thus will tend to argue for a zero discount rate.
4. ANSWER ONE OF THE FOLLOWING TWO QUESTIONS: Suppose that the country of Emerald Coast had real
GDP of $1000 in 1997. Suppose further that $100 of that GDP was
made up of sales of a local non-renewable resource extracted at
a cost of $50. In addition, $100 of that GDP was made up of direct
expenditures on pollution cleanup, and that despite cleanup, that
pollution caused $50 in environmental harm. What is Green GDP
for Emerald Coast in 1997? (HINT: Consider Hotelling rent to be
the difference between sales revenue and extraction cost). SHOW
YOUR WORK. Or What are the design principles that Elinor Ostrom
has identified as being associated with sustainably self-governed
local common-pool resources? For each principle, very briefly but
succinctly state why sustainable local self-governance might fail
in the absence of the principle. Provide one example of a locally
self-governed common-pool resource. Green GDP = GDP - Hotelling rents for depleted
resources - expenditures on pollution controls - the (external)
costs from pollution and environmental degradation Green GDP = $1000 - $(100-50) - $100 - $50 =
$800 Ostrom's Design Principles: 1. Clearly defined boundaries: Boundaries regarding who has the right to appropriate from the commons, and regarding the CPR itself, tend to be clearly defined. 2. Congruence between appropriation and provision rules, and local conditions: The rules that govern withdrawal of resource units from the CPR are tailored to local conditions. Local conditions include culture, the biomechanics of the CPR, and differences between resource users, among others. Rules that govern the provision of human-made CPRs similarly match local conditions. This principle argues against the "one rule system fits all" approach to self-governance. 3. Collective-choice arrangements: All stakeholders (people who use or are impacted by the CPR) are included in the formation of appropriation/provision rules, and in rule adaptation over time. 4. Monitoring: Those who actively audit CPR use and conditions are accountable to the appropriator group, or may be the appropriators themselves. 5. Graduated sanctions: Sanctions or punishments imposed for violation of rules reflect the extent of the harm imposed, and the context of the offense, and are established by the appropriator group themselves. 6. Conflict resolution mechanisms: Appropriators and their officials have rapid access to low-cost arenas to resolve conflicts among appropriators or their appointed officials. 7. Minimal recognition of the rights to organize: External government authorities do not block or hinder local self-governance. 8. When localized CPRs are part of larger systems,
small-scale governance systems are nested within larger governance
systems: Layering of governance structures match the interdependence
and complexity of CPR systems. One example of a locally self-governed common-pool
resource would be a Panchayat community forest in India, held as
clearly defined common property by a nearby village, whose citizens
set appropriation rules in a collective-choice framework (the van
panchayat), monitor and enforce those rules using graduated sanctions,
have conflict resolution mechanisms, and whose authority is acknowledged
by external government authorities.
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