EVSC 239

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EVSC 239
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Where are we now?

• Chapter 21 Review on your own (also suggest
  reviewing Chapter 8)
• Chapter 22 and 23 Last chapters

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Reminder Deadlines

• May 29 4 page preliminary draft with references
  (of course)
• i.e. 2,000 3,000 words (received only from
  Layal on time)
• Jamila received June 6
• Not yet received from Marwa (due June 5) and
  Mohamed (June 3)
• June 12-June 15 final paper (10 pages)
• i.e. 7,000 9,000 words
• Note 12 point times new roman font. 2 cm margin.
  No more than double space. Correct references. No
  plagiarism.
• Reminder quizzes for chapters

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Chapter 22 Just Distribution

• Why is the distribution of wealth and income a
  contentious issue?
• (1) people who are too poor will not care about
  sustainability. Why not?
• (2) people who are excessively rich consume large
  amounts of finite resources
• (3) if we care about sustainability, we must care
  about intergenerational distribution
• (4) we know the economic system cannot grow
  forever on a finite planet
• So if distribution is so important, why is it so
  contentious?
• Eco-eco in general distribution policies should
  not take away from people what they have earned
  through their own efforts and abilities. However,
• Who created those values?
• Is a fair price being paid?
• And what of the impacts of unequal distribution?

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Distribution

• Focuses on
• Income
• Wealth
• Market goods
• Nonmarket goods
• What are some policies designed to achieve a more
  just distribution?

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Caps on Income and Wealth

• What right does the state have to take what
  someone has earned?
• What is the other perspective?
• 1st law of thermodynamics
• What is the harm of accumulating wealth for
  status?
• (1) How do people show their status?
• (2) How is status measured? relative to others
  result zero sum game
• some policies progressive consumption tax.
  Progressive income tax. Progressive wealth tax.
• How is consumption a negative externality? Can
  you explain how a progressive consumption tax
  could even make the wealthy better off?
• (be sure to read Box 22-1)

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Minimum income

• How to guarantee a minimum income? What is the
  objective?
• Hmm those with the lowest income, typically
  spend the highest percentages of those incomes on
  consumption.. Positive-feedback loop?
• Maximize production or maximize utility?
• People have benefited from past contributions to
  productivity. How?
• What are those policies?

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Minimum income some policies

• 1. welfare programs
• 2. unemployment insurance for the unemployed
• 3. minimum wages (living wages?) and negative
  income taxes for the employed
• Are these the best approaches to ending poverty
  for either society or the recipients of such
  transfers? What are other ways?
• First equal opportunity in education, job
  access, and job advancement
• Second equal entitlements to wealth created by
  nature and by society, regardless of business
  ability of individual

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Distributing returns from the factors of
production

• Remember 4 sources of income wages, profits,
  interest, and rent
• Wages return to labor
• Profits returns to entrepreneurship
• Interest return to capital
• Rent return to land and other natural resources
• Most efforts at distributing income focus on
  returns to labor
• But greatest disparities in income are the result
  of the other factors of production
• So how do we distribute the returns to capital
  and the returns to natural capital?

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• Poverty, Growth and Income Distribution in
  Lebanon
• Heba El Laithy. Khalid Abu-Ismail. Kamal Hamdan
• http//www.ipc-undp.org/pub/IPCCountryStudy13.pdf
• This Country Study is based on a full national
  report that is the first to draw a profile of
  poverty in Lebanon based on money-metric poverty
  measurements of household expenditures. The
  report provides a comprehensive overview of the
  characteristics of the poor and estimates the
  extent of poverty and the degree of inequality in
  the country. It finds that nearly 28 per cent of
  the Lebanese population can be considered poor
  and eight per cent can be considered extremely
  poor. However, the most important finding of the
  report is that regional disparities are striking.
  For example, whereas poverty rates are
  insignificant in the capitol, Beirut, they are
  very high in the Northern city of Akkar. In
  general, the North governorate has been lagging
  behind the rest of the country and thus its
  poverty rate has become high. Levels of poverty
  are above-average in the South but are not as
  severe as expected. There are three other major
  results that have notable implications for a
  poverty-reduction programme in Lebanon. First,
  with few exceptions, measures of human
  deprivation, such as that provided by an
  Unsatisfied Basic Needs methodology, are
  generally commensurate with those for
  money-metric measures based on household
  expenditures. Second, the projected cost of
  halving extreme poverty is very modest, namely, a
  mere fraction of the cost of the country?s large
  external debt obligations. However, such a cost
  would rise dramatically if inequality were to
  worsen (i.e., if future growth were anti-poor).
  Also, the cost of reducing overall poverty would
  be substantially higher. Third, the poor are
  heavily concentrated among the unemployed and
  among unskilled workers, with the latter
  concentrated in sectors such as agriculture and
  construction. This places a priority on a
  broad-based, inclusive pattern of economic growth
  that could stimulate employment in such sectors.
  Based on such findings, the report concentrates
  on providing general policy recommendations on
  issues of directing public expenditures to poor
  households. One of its major recommendations is
  to concentrate on channelling resources to poor
  regions below the governorate level, such as to
  four ?strata? where two-thirds of the poor in
  Lebanon are concentrated. However, the report
  notes that macroeconomic policies, particularly
  fiscal policies, will have to be redesigned to
  mobilize the reources necessary to finance the
  increases in public expenditures on the social
  safety nets and public investment in social
  services that should be part of a major
  poverty-reduction programme.

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Distributing returns to capital

• Financial capital highly concentrated both
  within and between nations
• Returns to financial wealth, profits and interest
  are a major factor in the income disparities seen
  in the US and elsewhere
• What is a capitalist?
• Someone who owns capital.
• Market economies are based on ownership. A
  broader distribution of capital ownership could
  enhance the efficiencies of the market economy
  and possibly increase the ability of the
  system to provide important nonmarket goods and
  services. How?

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Land ownership

• Land worked by an owner with secure title is more
  productive than land worked by sharecroppers or
  wage laborers
• Why?
• What about day laborers? What incentive do wage
  laborers have to do any more than the minimum
  required?
• Economists typically consider work a disutility
  to be endured only to gain access to the material
  goods that provide us with utility. Does it have
  to be this way?
• An economic system should be devoted to the most
  efficient means of producing human well-being,
  not producing material goods
• One policy employee shareholder ownership
  programs (ESOPs)
• Another what happens if sufficient ownership of
  the industry resides with the local population?
  What would the local population strive to do?
  (Community Shareholder Ownership Programs CSOPs)
• What are pros and cons?

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So how to distribute ownership of capital?

• What is the goal?
• Increasing the efficiency of the economy in
  satisfying human needs and in internalizing
  externalities
• What policies will help achieve this goal?
• 1. Recognize that productive assets wear out and
  must continually be replaced. Working toward
  broader ownership does not require that we
  redistribute existing property but change
  ownership patterns for new capital
• 2. Mechanisms for achieving this have been tested
  and supported
• ESOPs (Employee Shareholder Ownership Programs)
• Most widely used system for broadening ownership
  patterns in capitalist countries. A number of
  tax incentives and other subsidies..
• Government contracts.. Preferential treatment

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Distributing the returns to natural capital

• (1) returns from the extraction of natural
  resources are often classified as profit when in
  reality most are actually rent
• What is rent?
• Rent is the profit above and beyond what is
  required to supply the resource. The supply of
  nonrenewable resources is fixed. The sales price
  of many renewable resources if often higher than
  would be required to supply the market
• (2) many of the returns to natural resources are
  in the form of hidden subsidies
• How?
• Externalities

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How? Some ideas

• (1) ending public subsidies
• Example pay small royalties for extracting
  state-owned resource
• (2) Alaska Permanent Fund and Sky Trust
• Sky trust?
• Bundle of policies designed to address scale,
  distribution and allocation. Scale and allocation
  via quotas that are auctioned off in ITQ. Returns
  would go into at trust fund to be equally
  distributed to all citizens. Redistribution of
  funds how?
• What are some concerns with this idea? How could
  it be improved?
• (3) land tax
• Land ownership typically highly concentrated.
  Note land is more valuable due to its proximity
  to others. Land values created by society, not by
  the landowner. But land supply is fixed. Thus all
  returns to land are economic rent

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More on land tax

• One thought since society creates the value in
  land, society should share in the returns to land
• Options?
• Redistribute land ownership
• Or redistribute the rent via land taxes
• Higher tax increases cost of owning land and thus
  decreases value of land
• Theoretically the price of land should the net
  present value of all future income streams from
  that land
• Higher tax reduces the income stream and thus
  reduces the price land speculation becomes more
  expensive
• Lower prices make land and home ownership more
  accessible

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Chapter 23

• Efficient allocation

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Holistic view

• is it true that if mechanisms can be developed
  for internalizing all external costs and valuing
  all nonmarket goods and services, market alone
  would lead to efficient allocation?
• what are the asymmetric information flows that
  shape our preferences and influence resource
  allocation?
• what are the policies aimed at macro-allocation?
  (allocation of resources between private and
  public goods)
• What are some problems confronting the allocation
  of resources under local control and national
  sovereignty that supply global public goods?
• What is a definition of efficiency more
  compatible with the goals of ecological
  economics?

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Pricing and valuing nonmarket goods and services

• Remember markets lead to efficient allocation of
  market goods by using the price mechanism to
  balance supply and demand
• So economists argue that if we could find
  monetary values for nonmarket goods and on
  nonmarket ecosystem services we could use the
  market mechanism to efficiently allocate
  nonmarket goods
• So much research in env eco on calculation of
  prices of nonmarket goods

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Lets examine this

• What is more expensive water or diamond?
• What is more valuable? How?
• Price is exchange value or the marginal use
  value of the good or service in question
• Use value is the total value or the value of
  all units together
• The use value of water is infinite
• But where this resource is abundant, the value of
  an additional unit approaches 0
• When it is scare, an additional unit may mean the
  difference between life and death, so the
  marginal value becomes immeasurably large
• Same applies to any essential good or service

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In essence

• When an essential resource is scare, the marginal
  value is extremely high, and it increases rapidly
  with growing scarcity
• As we approach ecological thresholds, the
  marginal value and thus the price of ecosystem
  goods and services will increase very quickly
• How to internalize those ecosystem values? We
  need to constantly recalculate them and
  re-centralize the information and then re-feed it
  into the market mechanism via taxes or subsidies
• This process is expensive

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Uncertainty, ignorance and unfamiliarity

• Additional problems
• The methods for valuing nonmarket goods are
  filled with problems
• Most depend on artificially constructed markets
• Two big problems
• Lack of knowledge of ecosystem function
• Lack of familiarity with valuing nonmarket goods
• Contingent valuation
• Carefully read Box 23-1 and Box 23-2

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Time, distribution, and valuation

• What about the time factor?
• Typical decision sacrifice a renewable flow from
  a natural fund-service for a nonrenewable
  fund-service or for a one-time liquidation of
  stock?
• Compare present values with future values
• How?
• No agreed upon objective rule for determining an
  appropriate discount rate
• Ethical question about intergenerational
  distribution

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Market vs nonmarket values

• Market for votes?
• Eco eco Attempting to calculate an exchange
  value for all nonmarket goods, then using that
  value to decide what we will preserve and what we
  will destroy is an example of economic
  imperialism
• Ecological economics takes the broader
  perspective that such methodologies are
  inadequate to capture the range of human values
  and physical needs we have for nonmarket goods.
  We should act on our knowledge that zero is the
  incorrect price and spend our time trying to
  improve upon and implement policies that
  recognize they have significant, often infinite,
  value

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Macro-allocation

• What is it? It is the problem of how to allocate
  resources between the provision of market and
  nonmarket goods
• Government plays a role in providing nonmarket
  goods and can influence demand through taxes
  and subsidies
• Do the people have enough information regarding
  nonmarket goods and services to influence their
  government?
• What are the policies addressing information
  flows?

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Asymmetric information flows

• What is it? Where either the buyer or seller has
  information that the other does not have, and
  that information affects the value of the good or
  service exchanged
• A market failure. Example?
• How does this lack of information affect price?
• Buyer adjusts the price based on the risk the
  risk-adjusted price lt value. Rational seller
  wont sell at that price. The market thus
  provides products at that reduced value
• Advertising buy. Advertising for not buying?
• Advertising convinces us to degrade or destroy
  public goods for private gain. Explain.
• Advertising creates wants by making us believe we
  need but it gives us no greater ability to
  satisfy those wants
• What can be done?
• Tax advertising as an externality? A public bad?
• Full disclosure advertising?
• Free time for public service announcements?

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Additional points

• Spatial aspects of nonmarket goods
• Local level? National / regional level? Global
  level?
• International policies
• beneficiary pays principle those who benefit
  pay for the benefits they receive
• International subsidies for ecosystem
  preservation
• Transaction cost of getting the wealthy nations
  to agree to pay Brazil, eg, to reduce
  deforestation
• How much each must pay
• To whom should the subsidy be paid
• ICMS ecologico a tax on merchandise and
  services some money refunded to municipalities
  to the extent they meet ecological goals a
  payment for provision of ecological services.
  Funds dispersed after goals are met
• How to do it globally?

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Redefining efficiency

• Comprehensive efficiency ratio of services
  gained from manmade capital stock to the services
  sacrificed from natural capital stock
• Service efficiency
• Technical design efficiency, allocation
  efficiency, and distribution efficiency
• Maintenance efficiency or durability
• Growth efficiency of natural capital and Harvest
  efficiency
• Natural capital stock/natural capital stock
  services sacrificed
• Either increase Natural capital stock or decrease
  sacrifice