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 “Shale Gas Extraction: The Need to be seen to be clean.” and
“Regulation Lax as Gas Wells’ Tainted Water Hits Rivers.” Like every other
resource, there is a finite amount of natural gas and its extraction and use comes with
potential benefit, direct cost and opportunity cost. All three can be accounted for in
monetary and non-monetary measurements.
Students get full credit if they correctly identify micro opportunity costs as the
alternative uses of particular resources (e.g. when we use timber to make a house, we
forgo the opportunity to build furniture with the same timber) and macro opportunity
costs as the damage to ecosystems that results from the extraction of raw materials
from nature and the return of waste (e.g. when we convert a forest into timber, we
forgo the ecological benefits generated by the intact forest, and generate pollution
from chain saws, saw mills, timber shipping, etc.), and provide at least one example
of each.
a. What are the Macroeconomic Opportunity Costs for the extraction of Natural Gas,
as presented by The Economist & The New York Times Articles? (5pts)
The macro opportunity costs are what is foregone by engaging in hydro-fracking.
This would include safe, reliable drinking water that has been destroyed, clean
waterways, clean air which is polluted now with the smell of “raw sewage mixed
with gasoline”, the good health of the population, which has now been degraded
with asthma, dizzy spells, etc. You could make a case that the natural,
unobstructed landscape is an opportunity cost, since that is foregone when large
rigs dot the landscape.
b. What are the micro opportunity costs of ‘hydro-fracking’? (5 pts.)
The micro opportunity costs of investing in ‘hydro-fracking’ 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.
c. What are the externalities associated with ‘hydro-fracking’? (4 pts.)
The externalities discussed include impacts on human health and the environment.
The higher asthma rates, the unsafe drinking water, the lower air quality are all
externalities caused by fracking. Students could discuss the specific types of
pollution, the chemicals, the deteriorated water quality in creeks, etc.
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. (8 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
3. Explain how the preanalytic vision of ecological economics leads to the
conclusion that macro-opportunity costs are inevitable. (8 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