Assignment 2: Important concepts in Economics 30 points. Keep your answers short.
NOTE: My answers are much longer than required, and are intended to help drill the
concepts into your head.
1. Read the articles “A Battle in Mining Country Pits Coal Against Wind”, “Despite
Costs, ‘Clean Coal’ Remains Obama Priority” and (optional) “Cleansing the Air
at the Expense of Waterways”. What are the micro and macro opportunity costs of
‘clean’ coal? (7.5 pts.)
Students get full credit if they correctly identify micro opportunity costs as the
alternative uses of particular resources and macro opportunity costs as the damage to
ecosystems that results from the extraction of raw materials from nature and the
return of waste, and provide at least one example of each.
“Clean coal” means removing the emissions of carbon dioxide and other pollutants
from combustion. It says nothing about the environmental impacts of mining, or the
environmental impacts of disposing of the emissions in other ways.
The micro opportunity costs of developing “clean coal” are the alternative uses of the
R&D money, materials and scientists—for example, they could be used to improve
energy efficiency, develop other sources of clean energy, or sequester carbon through
reforestation, which is currently much cheaper than carbon capture and sequestration
from coal.
The macro-opportunity costs discussed in the first article include environmental
impacts in a very high biodiversity area, impacts on human health, impacts on scenic
beauty and the loss of tourism, and the loss of elevation required for wind.
Extracting coal inevitably causes enormous amounts of environmental harm, which
are carried to an extreme in mountain top mining. When we remove mountain tops
and destroy our waterways, we lose habitat for biodiversity, regulation of water
supplies, regulation of atmospheric gases, recreational opportunities, housing, etc. We
also use huge amounts of energy to extract coal, with all the problems that entails.
Macro opportunity costs in the optional article focus on the impacts of pollutants
when disposed of in our waterways rather than in our air.
I reckon we’ll develop clean coal technologies about the same time we develop
humanitarian landmines.
Relevant quotes include:
Environmental impacts: “devastating to the local environment”; “one of the last
intact mountaintops in a region whose contours have otherwise been irreversibly
altered by extreme surface-mining techniques”; “The resulting debris — a mixture of
rock, dirt and other leftovers known as “spoil” — is dumped into valleys and streams
below”; “at least 500 mountaintops and roughly 1.2 million acres in four states that
have been altered by mountaintop removal. The Appalachian Voices report estimated
that 352,000 acres and 136 mountains have been affected in West Virginia alone.”;
“forests in this part of the state are among the most biologically diverse in the world.”
Health impacts: “valley fills, which have been linked to increases in potentially
hazardous chemicals downstream.”
Impacts on tourism and wind (i.e. job alternatives): “curbing mountaintop removal,
by whatever means, would not only protect some of that diversity — and perhaps
help lure more tourists — but would also create more coal jobs, because it would
make coal companies go back to more labor-intensive underground mining.”; “a
decapitated Coal River Mountain would no longer be suitable for wind development”
2. Read the article “Rich Man’s Burden”. Use marginal analysis to argue that rich
people should work less than the poor, and opportunity cost to argue that they
should work more. (7.5 pts.)
Most economic decisions we make are made at the margin. When deciding how much
to work, we should not be thinking about our total salary, but rather about how much
additional money we’ll make by working another hour. The marginal benefits of
more money should be lower for rich people than for poor people, and therefore they
should be less willing to work an additional hour. This is clearly not the case, as the
article describes. Part of the reason is that wealth is relative—while conventional
theory claims that we should only worry about our own welfare, people clearly
compare themselves to others, and the wealth of others affects our perceptions of our
own wealth. The other reason, and the one I am looking for, is that the opportunity
cost of leisure time is much greater for people who earn high incomes. Someone
earning minimum wage has an $8 opportunity cost per hour of free time, while a CEO
of a typical American company has an opportunity cost of thousands of dollars per
hour of free time.
4 points for a correct explanation of either the marginal analysis or opportunity cost
arguments, and 7.5 for both.
3. Read the article “New Rules Issued on Coal Air Pollution”. According to the
article, what are the costs of new rules on coal air pollution. What are the
benefits? Do you think it is appropriate to measure both costs and benefits in
dollars? (7.5 pts.)
4 points for listing some of the costs and benefits from the new rules, 4 points for
a good discussion of appropriateness (there is no right answer for this, but
arguments should be thoughtful), and 7.5 for both.
New rules on coal air pollution would bring impressive health benefits, annually
preventing thousands of premature deaths and heart attacks, hundreds of thousands of
cases of respiratory disease, and nearly 2 million days of missed work or school.
Studies suggest the value of these benefits at $120 billion per year. Presumably, there
would also be profound impacts on ecosystems, agriculture and forestry, and even
infrastructure, as SO2 and NOx are major contributors to acid rain, which reduces
plant productivity and destroys stone and metal. However, the article does not
mention these benefits. In contrast, the costs of compliance would be $2.8 billion per
year.
Note that this implicit cost benefit analysis places a monetary value on human lives,
which many people do not approve of. It appears to place no value on the
environment, which is not even mentioned. Monetary valuation is based on exchange
values, which assumes that everything is substitutable. I don’t think we can measure
all values in monetary terms. When economists tell me we can place monetary values
on anything, which is pretty common, I always ask “how much for your daughter?”.
Many ecological economists instead talk about ‘lexicographic values’, which means
that A is preferred to any level of B. (Lexicographic is like alphabetical order. A
always comes before B, no matter how many Bs there are).
4. Explain how the preanalytic vision of ecological economics leads to the
conclusion that macro-opportunity costs are inevitable. (7.5 pts.)
We live on a finite planet. The laws of thermodynamics tell us that it is impossible
to make something from nothing. Everything the economy produces requires raw
materials provided by nature. These raw materials alternatively serve as the
structural building blocks of ecosystems. When we remove structure, we lose
functions, and the functions provided by healthy ecosystems provide us with
numerous benefits, including life support services essential to our survival. It is
equally impossible to make nothing from something, and when economic
products inevitably break down or wear out, they return to nature as high entropy
waste, which frequently damages ecosystem function. All work requires energy,
so all economic production requires energy, which in modern society consists
primarily of fossil fuels. When we burn fossil fuels, we create pollution, which on
a finite planet must return to the ecosystem as waste, again degrading ecosystem
services
½ credit (4 pts) for explaining that resource extraction imposed macro opportunity
costs, and ½ credit for explaining that waste emissions do so.