EVSC 239

1. EVSC 239

2. Where are we now? • Chapter 21: Review on your own (also suggest reviewing Chapter 8) • Chapter 22 and 23: Last chapters

3. 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

4. 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?

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

6. 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)

7. 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?

8. 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

9. 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?

10. 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.

11. 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?

12. 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?

13. 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

14. 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…

15. 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

16. 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

17. Chapter 23 Efficient allocation

18. 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?

19. 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

20. Let’s 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

21. 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

22. 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

23. 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

24. 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…”

25. 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?

26. 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 < value. Rational seller won’t 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?

27. 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?

28. 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