Download Introduction to Economics: Session 1 SIO 295 Summer 2007

Introduction to Economics: Session 1
SIO 295
Summer 2007
Three Motivational Examples -- Climate Change, Fisheries, Turtles
A. Responding to the Climate
Change/Global Warming Challenge
 Fundamentally an Economic Policy Issue: What choices do we,
as a society, make?
-- Choices to Limit GHGs
-- Choices to Accommodate or Mitigate effects of global
warming
• How do we choose?
-- What are the appropriate criteria to use to evaluate
alternative choices?
Fundamental Economic Principle: Every
economic choice involves "Trade-offs" or a
weighing of Costs and Benefits
• Examples of Trade-offs in Climate Change
-- Limit GHGs now vs. Mitigate effects later (and limit GHGs later)
-- Reduce energy consumption vs. substitute cleaner alternative energy
(e.g. nuclear)?
-- Tax carbon emission ("carbon tax") or enact transferable carbon
emission permits (e.g "Cap and Trade")?
-- Reduce GHG emissions of developed nations first (e.g Kyoto Treaty) or
reduce GHG emissions of all nations ("equitable burden-sharing")? -- or, should
"rich” (who are responsible for the bulk of GHGs) first reduce their emissions
before requiring "poor" to reduce their emissions and suffer lower economic
growth?
Fundamental Economic Principle: All economic
consequences (costs and benefits) can be measured (in
principle) in monetary units
"In theory there is no difference between theory and practice, in practice there is."
-- Yogi Berra
- Implication: The only consequences that are relevant
for economic analysis are those that are valued by individual
human beings
- Definition: The monetary value of a consequence (a
cost or a benefit) is the amount of money an individual (or
group of individuals) would be willing to accept (if a cost) or
pay (if a benefit) to endure or obtain the consequence.
Fundamental Economic Principle: An Optimal or Best
economic choice is always one that maximizes the (Net)
Total Economic Value (the sum of all benefits less the
sum of all costs).
- Note: An optimal economic choice is never unique
since, at a minimum, alternative distribution of benefits
can (in principle) be defined without altering the (Net) Total
Economic Value. This fact alone allows ample scope for
negotiation, bargaining, etc.
Fundamental Economic Principle: For every suboptimal economic choice, there is an optimal
economic choice that (in principle) everyone
(currently alive or who will be alive sometime in the
future) would prefer to the sub-optimal choice.
(This Principle is a Proposition -- not an assumption)
- Note: Restricting economic choices to optimal ones
should thus permit broad concensus to avoid making
sub-optimal decisions.
Example or Implication: In principle, it should be
possible to decide how much abatement (if any) of
GHGs the world should undertake immediately.
Two Major Complicating Conceptual Problems with
measuring economic values
1. Economic consequences of (nearly) any (significant)
decision occur over time.
Fundamental Economic Principle: Identical
consequences occurring at different dates (e.g. now
vs. in the future) do not have the same economic
value. In general, any given benefit is worth more if
received sooner and any cost is less burdensome if
incurred later.
-- Implication: Sacrifices made today (e.g. reducing energy
consumption) to realize benefits far in the future (100
years from now) are difficult to justify with conventional
rates of discount -- e.g. a $10,000 benefit 100 years from
now is worth only $76 today, if the discount rate is 5%.
-- Ethical question: Should an individual 100 years in the
future be valued lower than an individual alive today?
-- Trade-off question: What sacrifices should the (relatively)
"poorer" current generation make to benefit a (relatively)
"richer" future generation? E.g. Since our greatgrandchildren will be much wealthier than us, how much
should we sacrifice today (by reducing, say, our energy
consumption) to benefit them?
2. Future consequences are rarely (if ever) known with
certainty.
- Fundamental Economic Principle: To the extent
that an individual is "risk-averse", the value of an
uncertain (future) benefit is smaller than the
"expected" value of (the distribution of) the
(future) benefit. (Analogously for costs -- an
uncertain cost is more burdensome than its
expected value.)
-- Implication: If there is a non-negligible likelihood of "catastrophic"
climate change consequences, then considerations of the amount of
risk aversion of society dominate considerations of the appropriate
discount rate to use.
-- Note: It may be useful to remember that society has dealt with (and
continues to confront) other challenges that are potentially even more
catastrophic than those of global warming -- e.g. an outbreak of nuclear
warfare during the Cold War.
B. Sustainable Management of Fisheries
- The Problem: Numerous reports ("Pew Commission", Worms,
et. al., etc.) document the declining levels of world fish stocks,
including the collapse of many (e.g. Great Banks Cod -- c.f.
Kurlansky). How can/should national and world fish stocks be
sustainably managed?
- Origin of the Problem: Historically fishing has been (and
continues to be in many fisheries) operated under the rules of
Open Access and Capture -- i.e. anyone can fish and harvest
whatever s/he can catch. Since no fisherman can therefore
expect to catch any fish that left for next season, there is no
economic incentive to leave any fish uncaught today to
reproduce for the future. As a result, stocks tend to be fished
beyond sustainable limits until they collapse.
Fundamental Economic Principle: A Common
Property Resource (like an Open Access and
Capture fishery) tends to be over-exploited since
no individual using the resource has an incentive
to consider how his/her actions may impose
costs on others (e.g. through reducing the
reproducing stock or, merely, by leaving less of
the resource available for others). This has been
called "The Tragedy of the Commons"
- Definition: The surplus value obtainable from the
use of a resource (the difference between the
benefits of using the resource -- e.g. market value or
revenues -- and the costs of its exploitation) is called
the "rent". Over-exploitation of a resource thus
leads to "rent dissipation".
• Over the years numerous alternative policies have
been adopted in national to reduce the amount of
fishing effort and the amount of fish harvested -- e.g.
licenses to fish, vessel registry, gear restrictions,
season limits, area closures, quotas (total and
individual), etc. These alternatives include both input
and output restrictions and regulations.
Fundamental Economic Principle: The restriction
of rights to fish change the incentives of
fishermen and create implicit or explicit property
rights that have economic value equivalent to the
rents obtainable from the resource by exercising
these property rights.
- Fundamental Economic Principle: The opportunity
to freely trade rights (for money) always
increases the net benefits of both the buyer and
seller.
- Fundamental Economic Principle: The "Holy Grail"
of fishery management is the establishment of a
complete set of property rights or Individual
Transferable Quotas (ITQs) where the sum of all
individual quotas equals the optimal Total
Allowable Catch (TAC). The optimal TAC is the
amount of fish that can be sustainably harvested
every period and maximizes the economic yield
of the fishery.
- A distinction: There is a difference between the Maximum Sustainable
Yield of a fishery its Maximum (Sustainable) Economic Yield. The
Maximum Sustainable Yield is the maximum amount of fish that can be
harvested every period (year, say) while leaving enough fish to
reproduce enough the next period to continue harvesting that amount.
-- Query: Can you explain why it is not obviously optimal to maximize the
sustainable yield?
Fundamental Economic Principle: Under
"standard" conditions, the maximization of Net
Benefits occurs where the Marginal Benefits
equal the Marginal Costs.
- The Maximum Economic Yield of a fishery occurs at the stock level at
which the value of the growth of the marginal fish (i.e. the value of the
extra fish that could be sustainably harvested if the stock were
marginally larger) equals the marginal cost of catching fish (i.e. the cost
of catching the marginal fish).
Difficulties in Achieving the Fishery
Management's "Holy Grail"
1. How should the "losers" be compensated,
i.e. bribed so that they don't politically
sabotage the establishment of an optimal
policy? The use of "buy-back" programs is an
example of attempts to compensate losers in
establishing a better managed fishery.
2. Who or what agency can manage High Seas
fisheries?
Under current International Law (including the Law of
the Sea), ocean waters beyond the 200 mile limit are
global common property and exploitable by any
nation that chooses to fish them. As a result, the
management of Highly Migratory Species (i.e. fish
that move in international waters) requires an
effective International Agreement or Treaty.
Furthermore, for an International Agreement to be
effective it must be self-enforceable, since under
International Law, no nation can be obligated to join a
treaty or abide by treaty that it has signed.
3.
Informational problems may prevent an efficient
solution to the management of fisheries.
Fundamental Economic Principle: Asymmetric
information creates distortions that complicate
obtaining high economic value
- Example: A fishery agreement to regulate harvest
may be difficult to conclude if parties have different
information about location of fish -- c.f. San Diego
sea urchin fishery
4. Problems of verifiability and monitoring
complicate the enforcement of
agreements.
C. The Protection and Preservation of Sea Turtles
Problem: Among the world's endangered species, all
species of sea turtles are to various extents
endangered. The most endangered species is
probably the Pacific Leatherback, which has perhaps
fewer than 5,000 nesting females and which nests on
only a handful of remaining beaches in the Eastern
and Western Pacific. Threats to the continued
existence of the Pacific Leatherback include:
destruction of nesting beaches through coastal
development and the destruction of forest coverage,
egg harvesting and egg destruction by wild animals,
entanglement in coastal fisheries' nets and lines, as
bycatch in high seas long-line fisheries, and climate
change that may erode beaches and alter
temperatures of sand.
Why do we care? Sea turtles are a Global Public
Good in that their very existence provides benefits to
all human beings.
Definition: A Public Good is a commodity (a good or
service) that is consumed/enjoyed by all (i.e. is "nonrival" in consumption) and whose
consumption/enjoyment cannot be limited or
restricted to only those who can be forced to pay for
its consumption/enjoyment (i.e. is "non-excludable").
A Global Public Good is a public good available to
the entire world's population.
Fundamental Economic Principle: A public good
tends to be underprovided (or underproduced)
since consumers have an insufficient incentive to
contribute for its provision as they cannot be
excluded from consuming whatever amount is
provided -- (this is referred to as The Free-Rider
Problem of Public Goods) -- and
producers/supplies have an insuffient incentive
to supply an optimal amount of the good since
they cannot charge all consumers for their
consumption/enjoyment of the good.
- Note: The public good underprovided in the case of
sea turtles may be thought of as sea turtle protection.
- Because of the public good nature of sea turtle
protection, sea turtle conservation programs and
policies are frequently financed and developed by
NGOs, working with governments and communities
containing nesting beaches -- viz. nesting beach
protection and monitoring, maintenance of
hatcheries, etc.
- Since sea turtles are listed as Endangered Species,
there are legal requirements for governments to
engage in direct protection activities -- e.g. (1) NMFS
is obliged to regulate fisheries in manner not to
endanger sea turtles. In addition, US Government
restricts the importation of shrimp from nations that
do not require Turtle Excluder Devices (TEDs) to be
used in their shrimp trawl industry,
(2) the Hawai'i shallow-set long-line fishery (i.e.
swordfish fishery) is operating under restrictions of
gear and bait type (circle instead of J-hook, mackerel
instead of squid bait), time closures, and -- most
importantly -- caps on the total number of turtle
"interactions" per year allowed.
- Restricting fisheries because of turtle by-catch under
Endangered Species Act provisions creates an
incentive for fisheries to support programs for turtle
conservation ("mitigation measures").
Fundamental Economic Principle: Under standard
conditions, if many activites contribute to the
creation of a benefit (e.g. the provision of a public
good, say), then at an optimal level of these
activities (i.e. the set of activity levels yielding the
"biggest bang for the buck") the marginal
benefits provided by the expenditures on each
activity must be equal. This principle is, however,
also consistent with the requirement that some
activities may required extensive expenditure
(e.g. beach protection) before much is invested in
other activities (e.g. costly fishery industry shutdowns.)