China Rising – Aljazeera series

Here is a new four part series from Aljazeera. After centuries of western dominance, the world’s centre of economic and political weight is shifting eastward. In just 30 years, China has risen from long-standing poverty to being the second largest economy in the world – faster than any other country in history. Part four below entitled “Made in China” focuses on China’s economic role in the world is growing at a record pace, and it is also now a key player in world politics. The country has no doubt become a global manufacturing giant, but how will it deal with issues on the home front such as increase in pollution and water shortages? Although it has been confronted with tough environmental problems, efforts are being made to solve these. To view other episodes click the link – China Rising

Shipping Industry pays for Negative Externalities – is it fair?

The shipping industry is taking a big hit on two fronts as it tries to stay afloat. With the current global conditions the industry itself is in the middle of a major downturn as there is too much supply chasing too little demand. To make matters worse the International Maritime Organisation (IMO) has introduced stricter environmental regulations to curb pollution – negative externalities. New regulations that ships have to adhere to:

1. Ships now have to burn cleaner and better grade fuel like diesel – ships used to burn cheap unrefined crude. This means a 50% increase in the cost of fuel
2. The IMO is making ship operators buy tradeable permits to emit CO2.
3. They are also introducing new standards for cleaner ballast water. It has been estimated that approximately 60,000 ships would need to be refitted and that would cost up to $1.7m each.
4. The EU are also proposing to introduce recycling levies on vessels calling at EU ports to pay for the safer scrapping of old ships

Is this fair? 90% of global trade is carried on shipping containers but they only emit 2.7% of the CO2 in the world. It seems that as a lobby group the shipping industry has been too fragmented and unable to influence policy like that of the airlines. See graph below for negative externalities.

A Level Revision: Comparing living standards over time and between countries

National income figures, usually GDP at factor cost, are the man figures used to compare living standards. This is because most countries keep and publish detailed national income data.

However, care has to be taken in using national income figures to compare living standards both over time and between countries. It is important to use GDP at constant prices (i.e. real national income) so that a misleading impression is not given because of the effects of inflation. It is also important to take into account differences in population size. A country with a large population is likely to produce more than a country with a small population. However, this output has to be shared out among more people so living standards are not necessarily higher. This is why economist divide output by population and compare real GDP per capita. Even when adjustments have been made for inflation and differences in population size, national income figures as a measure of living standards have to be interpreted cautiously.

A rise in real GDP per capital may have resulted from an increase in the output of capital goods. In the longer run this will increase productive capacity and result in more consumer goods being produced. However, in the short run people may not feel any benefit from more capital goods being made. An increase in weapons will also increase GDP but, again, may not necessarily improve living standards. If more police are employed and crime is reduced, the quality of people’s lives will be improved. However, if more police are employed to keep pace with rising crime, people will be feeling worse off. So economists have to look not only at the amount of goods and services produced but also at the composition of those goods and why the quantity has changed. In addition, the quality of goods and services produced should be examined. The same quantity could be produced this year as last year or five years ago but if the quality of the output has risen, living standards will have improved.

The distribution of income also has to be taken into account. National income may rise but if it is concentrated in the hands of a few, the living standards of the majority may not rise. See graph below (The Economist – 2nd February) showing the Gini coefficient of income inequality.

National income figures also fail to take into account some items which affect the quality of people’s lives. A certain amount of economic activity is not declared, either to avoid paying taxes or because it is illegal. If there is an increase in, say, people providing home hairdressing services but not declaring them, people’s living standards may rise, although this increase will not be reflected in the official figures.

Differences in working hours and working conditions are also not taken into account. If output remains constant but working hours fall, people are likely to have a higher quality of life.

National income figures only take into account economic activities for which a payment is made. They do not take into account externalities and non-marketed activities. So, for example, an increase in pollution will reduce living standards while an increase in people decorating the homes of old people, on a voluntary basis, will improve the quality of life of the elderly. Neither of these will be recorded in national income figures.

All of these factors have to be taken into account in using national income figures to make comparisons both over time and between countries. However, some additional factors have to be considered when making international comparisons. Different statistical methods are employed in some countries and the degree of accuracy can vary. Tastes and needs can be different in different countries. For example, people living in a cold climate have to spend more on heating than those in warm countries, merely to enjoy the same standard of living. There is also the problem of selecting a rate of exchange to make the comparison. Exchange rate fluctuate and do not always reflect relative prices in compared using purchasing power parities which compare the cost of a given basket of goods in different countries.

China’s most polluted city – Shinjiazhuang

Here is a clip I got from the Tutor2u A level economics blog. From Channel 4 news in the UK it takes you through what some of the 10 million residents in Shinjiazhuang live through – China’s most polluted city. Forced to wear masks every day there are some real concerns especially for the owner of an upmarket apartment block which is situated beside a coal-fired power station.

Economic Reflections of Lent – 2013

World Vision produced a booklet which contains one entry for each day in Lent and Easter. I was interested to read the entry for Day 23 – 11th March. A lot of ‘positive’ economic statements.

* I think that sex and economics are always related.
* Violent economic structures and sexual violence are always found together.
* Oppressing the most vulnerable poor will always be coupled with sexual oppression.
* Unrestrained economic greed and insatiable sexual desire are always in the same bed.
* An ecologically rapacious economy is at the heart of a culture of rape.
* Where avarice and greed rule the economy, sexual commodification will rule the bedroom.
* Idolatrous economies will always prey on the young. Always.

Free-Riders with fire insurance

This maybe useful for Unit 3 of the AS course. The Fire Service in New Zealand is currently funded on levies on fire insurance. However the incidence of fires in the last 20 years has dropped dramatically and the fire service has increasingly been attending to tasks not related to fires – this includes emergency situations like flooding, car crashes, hazardous waste problems to name but a few.

The New Zealand Herald mentioned that approximately 19% of calls for the Fire Service are transport-related incidents but only 8% of funding comes from that sector. Currently people pay a levy of 7.6 cents per $100 of a property’s insured value and this is capped at $100,000 = total levy up to $76 per year. Suggestions have been mooted with the idea of reducing the levy but increasing the cap – 4.6 cents per $100 capped at $250,000 = total levy up to $115 per year.

There is also those who do not insure against fire but still expect assistance from the fire service – between 5-10% of householders contributed no money to the Fire Service. Free-Riders!

Chinese house in middle of motorway – but will they get more compensation?

You might have seen this photograph in the NZ Hearld or The Independent newspaper in the UK. The motorway is in the province of Zhejiang and the couple were not satisfied with the compensation offered to them by the Chinese authorities and decided to stay put – known as ‘nail householders’ referring to how difficult it is to remove a nail from wood.

There was a similar situation in 2007 when a Chinese developer dug around a house in Chongqing city as the resident refused the amount of compensation offered for its demolition. One of the reasons for both these actions is that private individuals must agree before their property is demolished. In 2007 the National People’s Congress (NPC) passed a “property law” which is seen as a historic breakthrough to protect private property to an equal degree as public and collective property. This is the first time in modern China that private property has been protected by law.

“Clearer, enforceable property rights are essential if China’s fantastic 30-year boom is to continue and if the tensions it has generated are to be managed without widespread violence.” The Economist March 8 2007

Imported Carbon Credits kill forestry in New Zealand

With the recent dramatic fall in the price of carbon credits in New Zealand there are more dairy farm conversions and less pine trees being planted. With the New Zealand market being flooded with cheap carbon credits from overseas the price has dropped from $25 per tonne to $3. Therefore it is not economical for farmers/landowners to plant forests as a price of around $15 is required to make it worthwhile.

In 1990 about 500,000 hectares of forests were planted and they are due for harvesting in 2020. There is a need to sustain the industry and for ongoing plantings but under the current Emissions Trading Scheme in New Zealand it is hard to see anything happening. With the Global Financial Crisis there has been a surplus of carbon credits especially in Europe and with an over supply and weak demand the price has been downwards.

One of the major reasons for this low price in New Zealand is that no other country in the world allows 100% of low quality carbon units into their emissions trading scheme. Australia, China, USA, the European Union, Japan and Korea either ban these low quality units or permit them in very low numbers. As a result of this there is little faith in planting. 20,000 hectares of new tree planting is required each year to meet New Zealand’s emissions targets and to counter the harvest of mature trees.

Behavioural Economics: How to regulate the rate of alcohol consumption.

The Economist wrote a piece on the influence that the type of glass has on how fast you drink. Research by Angela Attwood of the University of Bristol has shown that the shape of a beer glass can regulate how quickly someone does drink. The experiment was done with 160 undergraduates – 80 men and 80 women – and they were asked to do one of four things.

1. Drink beer out of a straight glass
2. Drink beer out of a flute (a glass whose sides curve outward towards the rim)
3. Drink lemonade out of a straight glass
4. Drink lemonade out of a flute.

To complicate matters some glasses were half-full and others full. In order to acquire accurate research data the students were not told what the experiment was hoping to conclude but were led to believe that they were taking a language test after being shown various films. What the researchers were hoping to find out was how quickly the participants drank the 4 drinks. The time it took to consume the four drinks were as follows:

The full straight glass of beer – 11 minutes
The full flute glass of beer – 7 minutes
The full straight glass of lemondade – 7minutes
The full flute glass of lemonade – 7 minutes

The assumption from this experiment is that a beer drinker wishing to monitor how much he/she are drinking during the night uses the volume reamining in the glass with reference to the halfway mark. A curved-sided glass makes that judgment difficult and most volunteers thought the half-way mark in the flute was lower than its true value, and if a volunteer had drunk from such a glass originally, the degree of misestimation correlated with how fast he had drunk. If a glass is half-full to start with, however, this reference point is lost from the beginning. So the shape of the beer glass can affect how fast beer is drunk. Health campaigners and breweries might have differing opinions on what is the best shaped glass to serve beer.

Napier – Positive and Negative Externalities

I have been rather light on blog posts over the last week as I was in Napier for the New Zealand National Premier Schoolboy Hockey Tournament. However externalities did eventuate at the end of the week with King’s College retaining its national title but also the oil spill in Napier which was right beside where we were staying.

Externalities are common in virtually all economic activities. They are defined as third party (or spill over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.

Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years, not least because of concerns about the link between the economy and the environment.

Remember the graphs for negative externalities of production and positive externalities of consumption:

London – the price of traffic

Here is a really good documentary from the e2 Transport series. There are loads of examples of externalities in this clip and they discuss the merits of the congestion charge. Below is an extract from the PBS website.

As of 2008, cities were responsible for about 80% of greenhouse gas emissions and consumed roughly 75% of the world’s energy. Given that half of humanity lives in cities and that number is expected to grow to two-thirds by the year 2030, local policymakers in cities have a unique opportunity to affect the global climate crisis for better or worse. Ken Livingstone, the first directly elected mayor of London, has taken advantage of that opportunity to institute a number of policies that respond to London’s growth while also improving its livability.

The mayor created Transport for London (TFL), a local government body, that looks at all types of transportation including not only buses, subways, trains and motorists but also pedestrians and cyclists. TFL’s findings and actions have led to the reallocation of some roadways away from automobiles to buses, pedestrians and cyclists, resulting in a more equitable use of public space.

In 2002, the mayor launched the One Hundred Public Spaces Program to create or upgrade key public spaces and improve the quality of life in London. Trafalgar Square, Parliament Square and Kensington High Street are three of the places that have benefited from an initiative to give pedestrians priority over cars. While there is slightly less space on the roads for cars, which has upset some, the increased pedestrian traffic has revived London’s street life and changed the culture of the city for the better.

Heart attack capitalism

Just fininshing off Unit 3 of the AS course on externalities/market failure and I came across an article by former IMF Chief Economist and now Harvard Professor Ken Rogoff (co-author of “This Time is Different”) on obesity and the food industry’s link to the wider problems of present-day capitalism.

Obesity causes significant externalities – heart disease, some types of cancer, affects quality of life etc. It also impacts on others in that the health system (which is generally tax payer funded) has to expend more of its income – furthermore there is lost productivity. The chemical additives are well known as the major factors that increase weight gain amongst people but as Rogoff points out “from a conventional growth-accounting perspective, they are great stuff”. Who benefits?

Agriculture – paid (subsidies from Government) for growing corn
Food Processors – paid for adding tons of chemicals that make the food addictive
Scientists – paid for finding the right mix of salt/sugar to make instant food addicitive
Advertisers – paid for advocating it.
Healthcare industry – paid for trying to fix the problems caused by obesity.

Highly processed food also creates a lot of employment in various sectors including research, healthcare and advertising. The issue that Rogoff aludes to is that the policiticans would be very unlikely to try and fix this problem as companies who are making money from this industry are also providing significant funds for political campaigns. But there is huge market failure in that the consumer is provided with little information as to the negative effects of processed food but also children are persuaded by television advertising that dominates the commercial side of running televsion stations. Both consumers and producers have little incentive to internalise these costs.

We need much more regulation of these industries if we are to really consider the long-term interests of society. There is that balance between consumer sovereignty (control) and paternalism (Gov’t knows best) but greater information across a variety of goods/services needs to be evidnet if people are to make more informed choices.

Mobile phone going off – negative externality of consumption

I was reminded of this clip from Trigger Happy TV by John Wilson of Auckland Grammar. It depicts very well negative externalities of consumption. You are quietly wandering around a gallery – which you paid to enter – and suddenly a mobile phone goes off. The person answering it speaks rather loudly and distrupts the tranquil ambience of the gallery. You are assuming that the person when purchasing a ticket to enter the gallery had not consented to the mobile phone ringing whilst he was viewing the displays. However some may enjoy the spectacle and therefore it becomes a positive externality to them.

The Theory of Negative Externalities
This is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving.

If left to the free market goods that have negative externalities of consumption will be under priced (pm) and over consumed (Qm) compared to the socially desirable price and quantity. The government could tax the good, increasing its price to Ps and lowering the level of consumption back to more socially desirable levels Qs.

EU ETS – an oversupply of permits

The EU’s Emissions Trading Scheme has displayed an oversupply of carbon permits. In March this year the price of carbon permits plummeted to a record low after data suggested that Europe had produced a smaller amount of polluting emissions last year than had been thought. Below is quite an informative video explaining how the system works.

Pareto Optimality and the perfect wave.

Surfing is a growing sport and with it comes the demand for that wave that gives you the most utility. As stated in The Economist surfers’ behaviour is similar to that of the tragedy of the commons. In trying to catch a wave surfers informal queue for their turn and their seems to be informal property rights as to when you can take your turn.

To formalise this quota system an alternative is to grant ownership rights to the waves. This has been tried in Fiji and prices reached $4,000 for a day of surfing the “Cloudbreak”. Cloudbreak is a unique wave, in that it was actually regulated and owned by a surf resort. The only way to surf Cloudbreak was to check into the Tavarua Surf Resort in Fiji. The wave is about a mile from Tavarua Island itself, requiring a boat ride to get out there. However by 2010 the wave was open to the public and therefore became once again became a free service. Much of the African coast has the right kinds of waves that will increase the utility of surfers and are quite remote and free of the crowds. In fact the Ivory Coast and Senegal being close to pareto optimality – an empty wave.

Airbus + China + ETS = Prisoner’s Dilemma

Last week saw Chinese officials indicating that Chinese airlines will not buy European airplanes as long as the EU insists on including foreign airlines in its emission trading system. Orders of 35 Airbus A330 planes have been cancelled and another 10 A380’s were in danger of being cancelled because of the ETS. The Chinese argument is that it is not reasonable to charge Chinese airlines taxes at the same time that the plane is made in Europe. China currently buys more than 1 in 5 Airbus planes being produced and the total of Chinese orders amounts to US$9bn. Therefore one could say that the future of Airbus hinges on the ETS. This raises the question of climate change and what are the options that countries face.

Climate Change as Prisoner’s Dilemma
The initial impression from the discussions over climate change is that of a typical Prisoner’s Dilemma and some of the data provided in the Stern Review (2006) can be used to populate the payoff table.

–The cost of tackling climate change is approximately 1% of annual per capita GDP. However, if nothing is done about the issue the cost is estimated to be between 5% to 20% of GDP. So that defines what happens at the extreme of cooperative or non-cooperative behaviour. From the table above, a country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness – estimated here at an additional 3.0%. From the table it seems predictable that countries should prefer to be self-interested: the best national policy, if others reduce emissions, is to defect; likewise, if other countries are not taking action, then it is pointless to be the only sucker to take action, and one should again defect.

Repeated Prisoner’s Dilemma and Cooperation
The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions. He identified four elements to a successful strategy which is this case can be applied to climate negotiations:

1. Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.

2. Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.

3. Be Forgiving- when non-compliant countries come onboard give them generous applause; signal that good behaviour will be rewarded with even deeper cuts in your own emissions.

4. Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.

It is the belief of Michael Liebreich that this research by Axelrod should be put into practice by the world’s climate negotiators. As treaties on climate change are on-going and therefore become part of the game.

Khan Academy – some great presentations on Macro and Micro

Below is one of many really good presentations on macro and micro economics from the Khan Academy. They are particularly useful for the more theoretical parts of the course and include just about every topic in the AS/A2 syllabus as well as other presentations on current economic issues like the one below. Here they are looking at the difference between quantitative easing in the US and in Japan. Well worth a look.

Asia’s energy source – bring on the negative externalities.

According to the International Energy Agency (IEA) coal accounts for 20% of the primary energy supply in OECD countries. If you consider world consumption, coal accounts for 50% of the increase in energy use between 2000-2010. Not surprisingly 66% of the growth in demand for energy has come from Asia with China leading the world in coal production and consumption – some interesting facts:

1. China mines over 3 billion tonnes of coal per year – that is x3 when compared to USA
2. 80% of China’s electricity comes from coal-fired power plants
3. Burning coal is the biggest cause of air pollution.
4. By 2030 China is likely to consume 4.4 billion tonnes of coal.
5. From 2005 – 2030 – Carbon emissions are expected to increase from 6.8bn – 15bn tonnes

India also uses significant amounts of coal – 70% of its electricity comes form coal. It has 5th largest coal reserves globally but cannot extract it quick enough to satisfy the demand. However its emissions will increase by 250% by 2030.

In the emerging Asian economies the drive for more coal-fired power continues to steam ahead. Unfortunately alternative forms of energy don’t offer affordable electricity on a large enough scale to satisfy the Asian economies insatiable demand for energy. Natural gas which emits less carbon could be an option, but it will not take over from coal. Look out for those negative externalities – see graph below from Tutor2u.net.

Keynes 1926 pamphlet could have been written today.

Diane Coyle runs a blog called “The Enlightened Economist” which is very good for reviews of recently published economics books. One of her recent posts talked of the republished 1926 pamphlet by John Maynard Keynes – ‘The End of Laissez Faire’. Though Keynes states that an economy should be free of government intervention he suggests that government can play a constructive role in protecting individuals from the worst harms of capitalism’s cycles, especially concerns about levels of unemployment. Diane Coyle produces a quote (see below) from the book which is ironically similar to what is the anti-capitalist sentiment today. She also suggests that we need to go beyond the state versus market debate and recongize that the two type of systems need to work together to alleviate problems such unemployment, externalities, uncertainty, well-being etc.

“Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of the unemployment of labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production. Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease.”

He then goes on to say

“I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered. Even if these measures prove insufficient, nevertheless, they will furnish us with better knowledge than we have now for taking the next step.”

Canada opts out of Kyoto

The Kyoto Protocol was initially adopted on 11 December 1997 in Kyoto and Canada was one of the proactive countries in its implementation. However, on 13th December 2011, Peter Kent, the environment minister, announced that Canada was withdrawing from the agreement becoming the first country to do so. So, why the reversal of the commitment to the cause of reducing CO2 emissions?

From its inception, Canada’s Kyoto target was a 6% total reduction in CO2 emissions by 2012 relative to 1990 levels. However, all the positive rhetoric did not materialise and Canada has struggled to control, let alone, reduce its emissions. Between 1990 and 2009 emissions were 17% higher as free market policies of the Prime Minister Stephen Harper started to become much more prevalent in the economy.

It seems that the Canadian government is more concerned with the health of their economy rather than the planet. With rising oil prices it will make it even more attractive to extraction of oil from the Alberta tar sands – the only worry being that it will increase considerably the CO2 emissions in the atmosphere. It’s a choice of more growth or increasing CO2 emissions.

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The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.

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