Africa’s resource paradox and market failure

I have blogged a few times on the resource curse that affects some developing countries but it seems that in Africa a lot of resources go unused when they are actually demanded in an economy. There seems to be a lack of planning for supply and demand and build an infrastructure linking the two. The Economist came up with some good examples of this:

  • Ghana – generation vs distribution. The country produces too much electricity as Ghanaian usage per year equates to what someone in the US uses a fortnight. More than 25% of households in Ghana are not connected to the grid and 25% of electricity is lost due to derelict distribution infrastructure and theft. With regard to oil, Ghana spent over $4.7 billion on importing petroleum last year, despite having domestic petroleum refineries which are lying idle – they could produce 30% of its petroleum needs.
  • Uganda – like Ghana supply is greater than demand as capacity if nearly double peak demand. Trucks wait on the side of roads even though traders can’t find vehicles to transport their goods.
  • Ethiopia – largest livestock in Africa and tanneries to turn hides into leather but shoe and glove makers import leather from China. Local tanneries are concerned with how the leather is treated.
  • Nigeria – tomato-processing plant to make tinned paste but closed down due to crop failure caused by a voracious moth

Another issue is the completion of infrastructure projects – according to McKinsey approximately 80% of African infrastructure projects fail in the cost benefit analysis stage whilst fewer that 10% get the stage of acquiring funding. For Africa to further development there has to be some acknowledgement of market failure and a willingness to separate commercial power and political power amongst its government officials.

Source: How market failures are holding Africa back. The Economist 5th May 2022

For more on Market Failure and Development Economics view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Ireland’s first win against the All Blacks in New Zealand – Behavioural Economics

You maybe aware that the rugby game tonight between Ireland and the New Zealand All Blacks in Dunedin created history. It was the first time that Ireland have beaten the All Blacks in New Zealand. Remember they did beat the ABs in Dublin and Chicago.

Irish supporters, including myself, will take great pleasure in talking about such a result – I was at Eden Park last Saturday and disappointed at the number of mistakes Ireland made. What all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.

Those Irish supporters who traveled to Dunedin for the game will have no doubt spent a significant amount of NZ dollars tonight in the bars and restaurants around town. Nevertheless the satisfaction (utility) derived in NZ dollars from the game would have been much greater than the price Irish supporters would have paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. The success of the Irish team will boost merchandise sales and interest for the World Cup next year in France but more importantly it has been good for rugby in general with throwing the World Cup wide open. When the All Blacks play overseas there are significant externalities whether it be the revenue generated in hosting the match or the social benefits to society.

Furthermore the lead up to the game brings about a sense of delayed gratification (Behavioural Economics). Looking ahead the fact that people have paid for tickets to the World Cup means that they can reap the pleasures of anticipation of being there. Research (Smarter Spending – see previous post) shows that owning material things from expensive homes to luxurious cars turn out to provide less pleasure than holidays, concerts or even witnessing Ireland beating the All Blacks – where were you when Ireland beat the All Blacks in Dunedin? With Ireland’s win national pride increases, along with patriotism and people feeling better about themselves. This is turn brings people together and boosts well-being of the nation. As for the All Blacks they will learn from this defeat and it makes for a great game next week in Wellington. Go Ireland!

For more on Consumer and Producer Surplus view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Three Gorges Dam – Positive and Negative Externalities

Below is a very good documentary on the construction of the largest dam in the world – the Three Gorges Dam in China. However in its construction there are both costs and benefits including private and external. This is a topic in Unit 1 of the CIE A2 Economics syllabus and is found under – Externalities. Remember that we have both positive and negative externalities of production and consumption.

THE DIFFERENCE BETWEEN PRIVATE AND SOCIAL COSTS

 Externalities create a divergence between the private and social costs of production.

SOCIAL COST = PRIVATE COST + EXTERNAL COST (externality)
  • Private costs are the costs to a ‘firm of producing a good or service and to an individual of consuming a product.
  • External costs are the spill over effects on third parties.
  • Social costs are obtained by adding the private and external costs together. They reflect the total cost to society of an economic decision.

The same concept applies for Private and Social Benefits:

SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT (externality)

Benefits and Costs of building the Three Gorges Dam

Three Gorges dam - Externalities

The biggest benefit that is seen from the dam’s construction is that it produces renewable energy from hydro electricity. The Three Gorges Dam alone can provide China with 10% of its annual energy consumption. Increasing the proportion of hydroelectricity alternative to coal burning plants, will cut their emissions greatly which will help reduce the overall emissions all over the world – carbon emissions will be reduced 100 million tonnes compared to alternative coal generation.

Is Green growth rather than degrowth the way forward?

Martin Sandbu of the Financial Times in his Free Lunch on Film produced a very good video (see below) on how, with the help of technology, the global economy can be decarbonised without impacting on what is seen as normal growth rates. He travels to his native Norway where Oslo has around 30% of all its passenger cars being EV’s. The key to its success has been to make EV’s as affordable and attractive as conventional cars. Policies of tax exemptions on EV’s, lower tolls, cheaper parking and taxes on polluting vehicles have directed consumers to the cleaner option. He goes on to talk about the Kaya Identity. This is the relationship between four factors:

  • Global carbon dioxide emissions, in carbon dioxide (CO2);
  • Global primary energy consumption, in Ton of Oil Equivalent (TOE);
  • GDP, in dollars ($);
  • Global population, in billions.

In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix.

  • GDP/Per Capita: represents the total value of output in an economy divided by the population
  • Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy.
  • CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.

So from Kaya we can decarbonise in 3 ways:

  • shrink the world’s population.
  • limit and reduce incomes.
  • lower the amount of CO2 emitted for each dollar of GDP.

In some areas, like ground transport, it’s technologically feasible, even easy, to take the carbon out. In other areas, it’s more costly, more difficult, maybe even impossible to do by 2050: flying, cement making, meat production. The video is well worth the time to watch.

Negative externalities of consumption and how much sugar in a Coke?

Negative externalities of consumption is where the consumption of a good may have spillover costs or negative externalities for others e.g. passive smoking, drink driving, sugary drinks. 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 (Ps) and quantity (Qs). At Qm the MSC > MSB therefore the quantity needs to reduce until the MSC=MSB. The government could tax the good, increasing its price and lowering the level of consumption back to more socially desirable levels.

Source: Elearneconomics

Coke and how much sugar?

The video clip below, although a bit old, is from the BBC Newsnight Programme in which Jeremy Paxman interviews President of Coca Cola Europe James Quincey. How much sugar is in a cup of Coke? A ‘small’ cinema serving is said to contain 23 teaspoons on sugar, while a large contains 44 – ‘each to be consumed in a single sitting.’ You can see the amount of sugar for yourself when Paxman pours out the sachets in each cup. Like with the tobacco industry quite a few years ago, the pressure is now on drink companies to reduce the amount of sugar in drinks because of the negative externalities of consumption that are associated with it.

Externalities on elearneconomics has written answers that allows students to recall information and apply it to assessment style questions. Immediate feedback allows for true student-centred learning and understanding.

World Cup – the economics of faking an injury.

With the end of a long first term (11 weeks) approaching I try to add a bit of humour to the classroom as generally people are tired and add to that the numerous disruptions to COVID. Later this year the football World Cup takes place in Qatar and I hark back to the last World Cup where we saw the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing”. I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

For more on Cost-Benefit Analysis view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

Externalities of Food

Informative video from the FT that looks at the externalities of food covering – environmental cost, health costs and social costs. It focuses on the ‘True Cost Accounting’ and uses the example of coffee where a 1 kilo bag from Brazil costs $2 but the real cost is around $5.17 when you include that farmers are underpaid, there is unsustainable water use, air pollution, climate changing energy supplies and land degradation.

To encourage greater sustainability Rabobank introduced ‘The Rabo Impact Loan’ which is a low-interest business loan created especially for farmers that have a high sustainability performance. Good introduction to market failure.

Kaya Identity and climate change

Sustainable development is part of the CIE A2 Economic Syllabus and greenhouse emissions are significant barrier in trying to achieve specific goals. Sustainable Development Goals (SDG) requires a collective agreement and to advance towards a society which is more respectful of the environment, whilst at the same time working towards economic growth and sustainable development.
Kaya identity tries to explain the relationship between four factors:

  • Global carbon dioxide emissions, in carbon dioxide (CO2);
  • Global primary energy consumption, in Ton of Oil Equivalent (TOE);
  • GDP, in dollars ($);
  • Global population, in billions.

In other words global CO2 emissions from a human source = global population x quality of life x energy intensity x intensity of carbon in the energy mix. See the formula below:

GDP/Per Capita: represents the total value of output in an economy divided by the population
Energy/GDP: represents the energy intensity, i.e. the amount of energy used (in kWh) necessary to create a monetary unit, meaning to manufacture a product or provide a service. This intends to encourage us to rationalise our use of energy.
CO2/energy: represents the intensity of carbon in the global energy mix. This relationship demands a reduction in CO2 emissions in the production of energy, in particular through the promotion of energies low in carbon, such as renewable energy.

The focus from government and the private sector in reducing climate change has been on two of the four factors: Global carbon dioxide emissions, in carbon dioxide (CO2) and Global primary energy consumption, in Ton of Oil Equivalent (TOE). However should there be more emphasis on the other two: GDP and Global population? GDP can be influenced by government policy but there are political dangers if going down this avenue. Firstly by reducing growth you may limit the creation of jobs and the advancement of economies. Secondly developing economies depend on the demand from developed world to drive them out of poverty. Limiting population growth is not a policy that government’s can respectably push towards. Ultimately the global economy needs more than a power source without emissions but investment and innovation which can reverse the damage that emissions have already done. Below is an informative video on carbon markets from The Economist.

COP26 – a summary

Another good video from CNBC looking at the recent COP26 meeting. COP26 – Conference of the Parties – is the specific name of the annual United Nations Climate Change Conference in its 26th year. The first meeting was in Berlin in 1995. Main points from the video are:

  • 2015 Paris Climate Agreement – committed countries to limit global warming to no more than 2°C above pre-industrial levels with an aim for 1.5°C
  • Global warming is 1.1°C – on track for 2.4°C increase by end of the century
  • Rather than phasing out coal they would phase down – opposition from China and India
  • USA, EU and others stated that they would cut global methane levels by 30% by 2030
  • India to cut its emissions to net zero by 2070
  • Richer nations need to help finance emerging economies to cope with climate change
  • Present policies will see the temperature rise by 2.7°C.
  • If National Determined Contributions (NDC) targets are implemented then by 2030 temperature rise will be approximately 2.4°C.
  • If all targets are fulfilled the best case scenario is 1.8°C
  • GFANZ – Glasgow Financial Alliance for Net Zero – hope to raise $130 trillion from private capital to fight climate change.

COP26 – useful interactive

With COP26 conference underway the FT has produced a very good interactive graphic where you can select 193 countries’ historical emissions and future climate targets, as well as information on the energy mix that indicates their progress on renewable energy – below are screenshots of China and New Zealand. NZ having 0.14% of world’s annual CO2e and China coming in at 23.9% with fossil fuels being 70% of electricity production in China.

Although New Zealand’s emissions are small it has been a poor performer – between 1990 and 2018 emissions rose by 57% which is the second highest increase of industrialised countries. 2018-2019 increased by 2%. New Zealand’s nationally determined contribution (NDC) is to reduce net emissions by 50% below gross 2005 levels by 2030 which is a 41% reduction using an ‘emissions budget’ approach.

What is an emission budget?
An emissions budget is a total quantity of emissions that is allowed to be released during an emissions budget period. Each emissions budget covers a period of  five years (except the first emissions budget which will cover the period 2022 – 2025). Emissions budgets will act as stepping-stones, or interim targets, to reaching our 2050 emissions reduction targets. New Zealand’s legislated targets are for net zero greenhouse gas emissions (except biogenic methane), and a 24 – 47% reduction in biogenic methane, by 2050. Source: NZ Ministry for the Environment.

Black Caps Test Champions and positive externalities

In 2019 I stayed up all night to watch the Back Caps lose the World Cup One-Day final in England in what was such a bizarre finish and one felt for Kane Williamson and the side. However two years later and all has been forgotten as the Back Caps become the first ever World Test Champions. Captain Williamson like Richie McCaw, a humble character, has led from the front and just goes about his work in a quiet manner.

Black Cap supporters will take great pleasure in talking about such a result but what all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.

Those who were able to travel to Southampton for the game and will have no doubt spent a significant amount of British pounds tonight in the bars and restaurants around town. Nevertheless the satisfaction (utility) derived in pounds from the game would have been much greater than the price they paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. Furthermore the lead up to the game brings about a sense of delayed gratification (Behavioural Economics) especially after the disappointment in 2019 World Cup. Research (Smarter Spending – see previous post) shows that owning material things from expensive homes to luxurious cars turn out to provide less pleasure than holidays, concerts or even witnessing the Back Caps winning the first ever Test World Cup – where were you when the Black Caps beat India in Southampton? With New Zealand’s win national pride increases, along with patriotism and people feeling better about themselves. This in turn brings people together and boosts well-being of the nation.

Degrowth – is life better with less?

Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile. Increasing GDP has been the indicator of a healthy economy but is it time for degrowth? This CNBC video looks at whether degrowth is the way forward and should we priorities social and ecological well-being? Scotland, Iceland and New Zealand have focused on well-being rather than economic growth. New Zealand’s recent ‘well-being’ budget indicated this. Good video for the future direction of macro policies and where we are going as a society.

Natural Resources v GDP

The Economics of Biodiversity by Sir Partha Dasgupta was published in February this year and was a wake up call for all of us. Sir Partha says nature must be recognised as an asset and that our traditional measure of economic prosperity – Gross Domestic Product – is no longer fit for purpose. Basically all 7.8 billion of us is on a collision course with the planet.

“The problem with GDP is that it doesn’t include the depreciation of capital and one of the natural capital, or nature, which is somewhat different from buildings and roads in that you can really depreciate it very fast.”

Between 1992 and 2014 there was a 40% fall in the stock of natural capital per person – water, food, air etc. See graph below.

Global Wealth Per Capita, 1992 to 2014

Source: The Economics of Biodiversity by Sir Partha Dasgupta

Since 1950 the global economy has grown 14 fold and with the increase in prosperity has come the cost to our natural environment. With our current consumption we need an earth that is 1.6 times larger. Although there has been moves to slow the rate of climate change the progress needs to be accelerated. Larry Elliott in The Guardian looked at three ways:

  • Firstly you could simply stop the burning of fossil fuels or international travel now or in the near future.
  • Secondly you leave the issue of climate change to the markets: governments could stop subsidising the use of fossil fuels but otherwise leave it to inventiveness of the private sector to come up with solutions.
  • A third approach is to have a partnership between the government and the private sector. A previous example of this was the announcement by President Kennedy in 1961 that the US would put a man on the moon by the end of the decade. Larry Elliott quotes Mariana Mazzucato’s new book ‘Mission Economy’ in which she states that by focusing on the immense power of governments to shape markets, capitalism itself can be remade. Mazzucato aims to infuse capitalism with public interest rather than private gain.

Below is a recent video from CNBC about climate change which is already taking a financial toll on the planet, with extreme weather events costing the global economy $146 billion in 2019, according to insurer Swiss Re. Also an interview with IMF Managing Director Kristalina Georgieva about how governments and business can fight back.

Mega ships and diseconomies of scale

The mega ship the Ever Given was a familiar name in the news recently with it getting stuck in the Suez canal and thus preventing any marine traffic in both directions. The Ever Given is operated by the Taiwan-based firm Evergreen and is a so called mega ship and was carrying over 18,000 containers.

Mega (container) ships have been built in increasingly larger sizes to take advantage of economies of scale and reduce expense as part of using multiple forms of transport without actually handling of the freight itself. The big container ships can carry up to 23,964 twenty foot equivalent unit (TEU) whilst the smaller capacity ships have a maximum capacity of 1,000 TEU.

Herd Mentality and Prisoner’s Dilemma
This being said there is some dispute over the extent that the mega ships achieve economies of scale. A follow the leader mentality in ordering bigger ships have been since the mid 1990’s with firms following Maersk in ordering bigger capacity ships. In most cases it only takes two years for other carriers to catch-up to Maersk and in some cases they can hold more TEU. This has led to operators facing prisoner’s dilemma. Operators are trying to outdo their rivals by building larger ships which help increase its market share through their reduced costs but are fully aware that what actually is needed is capacity rationalisation. This strategy has not only fuelled the never-ending competition for large ships but also led to mistrust among operators, entangling them in the prisoner’s dilemma. The ideal scenario is for operators to refrain from acquiring mega ships and let supply and demand prevail.

Infrastructure costs to cope with mega ships
The graph below shows the savings and costs increases from increasing the capacity of mega ships. There is a saving with carrying more TEU’s but terminals will incur significant capital expenditure to handle larger vessels and terminal yards areas will need to increase by 33% to avoid congestion, even with no growth in volume. There are negative externalities to consider that arise from upsizing as dredging deeper channels and expanding yard area will have environmental effects.

Source: Diminishing economies of scale from megaships? Marine Money Japan Ship Finance Forum, Tokyo 12th May, 2016

Fishing – Tragedy of the Commons

The Tragedy of the Commons was a title of an article by Garrett Hardin in 1968 although the phrase is more commonly used to name the effect which it describes. It explains what can happen when a number of individuals share a common resource and each individual is presumed to act rationally and in his own interest.

For instance if there 10 different farmers grazing a piece of land then there is an incentive to add one more cow to your herd as you gain all of the benefit of this extra cow and you only have to suffer 1/10 of the cost resulting from the increased degradation of the land. Thus although it is in each individual’s self interest to increase the size of your herd, in the long run the land use will be depleted. This concept can also be transferred to CO2 emissions where countries emit emissions in order to grow their economy but don’t consider the long-term impact of global warming on drought and disease.

Recently a lot of attention has focussed on the fishing industry which is worth $16 billion annually. International law states that 64% of the surface of the oceans are defined as ‘the common heritage of mankind’ although with the advent of technology and bigger and faster fishing trawlers the last 50 years has seen a significant depletion of stock. Approximately 90% of fishing areas are fished to sustainable limits or beyond.

Stopping overfishing

The Economist – 22nd October 2020

Property rights has been the traditional policy to try and overcome the tragedy of the commons. This gives exclusive rights to coastal states to police and maintain territorial waters but the looting still continues – since 2010 the proportion of tuna and tuna-like species being overexploited has increased from 28% to 36%.

Reducing subsidies is seen as the most pressing policy as they come to $35 billion a year of 70% are given to more developed countries. It is estimated that $22bn of the subsidy helps destroy fish stocks. In giving subsidies you reduce the running costs of operators but it also brings certain fishing fields within reach for trawlers from developed economies. Only 10 countries received the money from high-seas catches between 2000 and 2010 and that is with Africa having more fishermen than Europe and America combined.

Closing off more areas fishing is another alternative and it has been suggested that 30% of oceans should be designated as ‘marine protected areas’. Countries could also take responsibility by creating marine reserves within their territorial waters. However technology has provided an opportunity to limit the over fishing. Compulsory cameras on board fishing vessels which can identify suspicious behaviour and illicit species should be compulsory especially in exclusive economic zones that define a country’s control over resources such as fish. Australia, America and New Zealand have invested heavily in this this area of surveillance. For example, reports of interactions with seabirds and mammals increased 7 times when electronic monitoring was introduced to Australia’s longline fisheries in 2015. Overall reported catch remained the same. In New Zealand regulations for on-board cameras on commercial fishing vessels came into effect in 2018 – they applied to vessels from 1 November 2019 in a defined fishing area on the west coast of the North Island. To mitigate the overfishing governments could agree on some policies:

  • National regulators to set basic standards for crew – no forced labour
  • Countries failing to follow rules – banned from fishing
  • Countries should only import fish from law abiding nations
  • WTO to scrap subsidies that encourage over fishing – see above
  • Outlaw bottom-trawling
  • Subsidies to fish farming – it now accounts for approximately 50 percent of the fish consumed globally

Source: The Economist July 16th 2016 & October 22nd 2020

The paradox of Norway – fossil fuel giant and leader in renewable energies

In 1969 the discovery of oil off the coast of Norway transformed its economy with it being one of the largest exporters of oil. A lot of countries in similar positions have succumbed to the ‘resource curse’ in which countries tend to focus on a natural resource like oil. The curse comes in two forms:

With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.

However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.

Norway – has a different approach.

In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

The Economist – Ecowarriors bankrolled by oil – 8-2-20

What are they doing?

  • 98% of electricity is from renewable energies and technologies
  • Heating with oil is to be banned this year
  • 50% of new cars are to be electric
  • Oslo has set a ceiling every year for its greenhouse gas emissions
  • Oslo removed nearly all parking spaces from the city centre – now bicycle docks / benches
  • Norway is hoped to be completely emission-free shipping fleet over the next couple of decades – this accounts for almost all of Norway’s oil consumption
  • Sovereign wealth fund will sell its shares in companies dedicated to oil and gas exploration

Norway and Liberia – Coarse Theorem

Coarse Theorem – Ronald Coarse argued that bargaining between parties could produce a mutually beneficial and efficient solution to problems like pollution.

An example of this was the a deal between Liberia and Norway. Norway will give $150m in aid in return for Liberia stopping the destruction of its forests. The stick approach of trying to force Liberia to stop cutting down its trees might give way to a more effective carrot approach by paying Liberia to do so. This makes both sides better off. Liberia still gets the aid and Norway gets to preserve biodiversity and take a small step against climate change.

Norway’s challenges

This being said there needs to be more emphasis on the service sector as an earner of GDP – this sector already accounts for 55% of GDP. According to The Economist Norway faces 4 challenges:

  • Reduce it focus on gas and oil
  • Increase its productivity through the use of technologies
  • Reduce carbon emissions to meet the Paris agreement goals on climate change
  • Create 25,000 jobs a year so that oil workers can find meaningful employment

Source: The Economist – Ecowarriors bankrolled by oil – 8-2-20

Using whiteboards to teach externalities graphs

I held my annual whiteboard competition with my A2 Economics class to see who could draw the best 4 graphs showing Positive and Negative Externalities of Consumption and Production. The winner this year was Fiona Leng with two highly recommended by Jemima Hodgson and Yanz Chen.

Fiona Leng

Jemima Hodgson

Yanz Chen

The externalities topic at A2 Level Economics involves being able to draw and understand four graphs. A different way of teaching this area of the course was to get students to use A3 size whiteboards so that they could practice drawing these graphs. This proved to be very successful with students for the following reasons:

  • the novelty of using whiteboards
  • if they made a mistake this could be easily rubbed out and they could start again
  • it allowed me to go around the class to correct graphs where necessary
  • students took pride in their graphs
  • the best set of graphs was posted on the econfix blog
  • students who were struggling could learn off others

New Green Deal – more about politics than economics

In Unit 3 of A2 CIE economics course you will no doubt have come across externalities – see graphs below. In simple terms the cost to the consumer must also be accompanied by the external costs (referred to as externalities) which is normally not paid by the consumer. 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.

This all seems very straight forward as you would assume the external cost (externality) of driving a car (emissions) would be added to the private cost of running the car (petrol etc). However carbon taxation is politically elusive as only 20% of global emissions are covered by schemes that put a price on carbon and only 1% of emissions subject to such schemes face a price as high as $40 per tonne of carbon dioxide. The Green New Deal proposes to a move to a 100% clean and renewable energy within a decade or two, and to zero net emissions by mid-century. Those who support the idea are sceptical about costs and funding as decarbonising the economy will require some serious capital.

For the Green New Deal to work it must mobilise a majority that are more passionate than the remainder. A carbon tax with a dividend may be appealing but the financial benefits are small when divided by the number of voters. Remember that an associated tax would encourage an aggressive response from wealthy fossils-fuel firms. A Green New Deal, in contrast, might promise sufficient goodies to organised interest groups, such as labour unions and domestic manufacturers, to gather a winning political coalition.

Some see the Green New Deal is something more radical. Roosevelt saw the Depression as both a threat to liberal democracy and the product of an economic system that put profits ahead of the welfare of the working man. Similarly, left-wing activists view climate change as the result of unbridled capitalism. They aim to solve it by redistributing economic and political power.

Source: The Economist – A bold new plan to tackle climate change ignores economic orthodoxy. 7th February 2019