Economics and Sustainable Development
Summary
The summary will be divided in much the same way as the lectures were. Seminars are also included
in this summary, you can find those at the bottom. However, whereas I refer to the seminars as
‘seminar’, mr. Delsen makes no distinction and sees them as part of the lectures. Therefore, every
third lecture (3,6,9 etc.) will be missing, and will be one of the seminars instead.
An exemption to this exemption (I know, a lot of exemptions, it’s like the Dutch language) is lecture
9, which does happen to be a lecture. This means lecture 10 is the seminar and is missing, etc.
,Lecture 1 Introduction; towards a prosperity state?
Figure 1: the economic system and environment
Figure 1 summarizes the course.
- We have an economic system, consisting of producers and consumers, that exchange goods,
services, labour, capital, and returns to production functions.
- mind that labour is not really a ‘market’ of its own, but it is included in the economic system
- Surrounding the economic system is the environment, from which the economic system pulls its
materials and energy. The environment provides life support, resource provisions, waste sinks and
amenities (= resources). We also look at energy, waste and recycling. Since the environment is
limited, that means economic growth is limited as well.
- humans pollute the environment with their economic activities. In this course we will find that to
regulate this pollution, we need to price it and how we can do so.
Rule of thumb: each doubling of wealth leads to about 80% more environmental pressure.
World population and GDP per capital have been on an extreme increase since the industrial
revolution. Using our rule of thumb, this means the environment has been pressured a lot more in
the last century as well. The biggest parts of energy consumption are made up of coal and oil, which
are limited resources. At some point we will run out, and then what?
Capitalism is an economic system characterised by:
- most of the means of production are privately owned
- production for the market
- operation to make profit → profit is main goal
- profit motive and inheritance law, supported by contract law forms the driving force of capitalism.
→ most efficient system in the world (as far as we know)
- this system doesn’t account for externalities like pollution
It seems like reducing wealth growth should help, right? However, this is not exactly true. We need
economic growth in order to address welfare problems. To explain this, we look at the Kuznets curve.
The Kuznets curve is used to explain how the welfare of a nation can scarcely be derived from a
measurement of national income. It shows the allocation and distribution of money with different
levels of national income. The curve is shaped like an inverse U.
- when income per capita is very low, there is almost no inequality. Everybody is poor.
,- when income per capita increases, so does inequality. The wealth is distributed to a handful of
innovators, while the rest remains poor. Think of factory owners in the industrial revolution.
- at some point there is a tipping point, where a further increase of income will cause inequality to go
down. In the end, everyone is rich.
This Kuznets curve can also be applied to the environment, where we look at the environmental
Kuznets curve. It has the same inverse U-shape, showing the stage of economic development and
pollution against each other. See Figure 2.
- before industries come up, there is no pollution. We are in a pre-industrial economy.
- when industries come up, pollution will start to increase as well. We are in an industrial economy.
- at some point there is a tipping point again, where we arrive in a post-industrial economy.
Economies become more service orientated. Economic development has advanced so much that
pollution starts to go down. Production is no longer the main goal.
- paired with economic development is the income per capita. It is a measurement for growth. In
order to reduce environmental degradation in the form of pollution, we need income growth!
Figure 2: the environmental Kuznets curve.
If we follow classical economic theory from Adam Smith, we miss some things. Smith was in favour
of the invisible hand, an economic phenomenon describing how the market would self-regulate itself
to an equilibrium in the long run. By only adhering your personal self-interest, this would cause the
highest public interest. For this reason, Smith advocated a laissez-faire policy where the government
is expected to intervene as little as possible.
The invisible hand misses a few fingers, though, as it doesn’t account for externalities. These are the
results of trade that are not included in the market price. These can occur on the consumption or on
the production side. They occur as positive, but we will mostly focus on them occurring negative, in
the form of pollution for instance. See figure 3.
, Figure 3: Showing the existence of externalities in a market.
The existence of negative externalities can be shown in the form of a market. This is the Marchillan
Cross. See figure 4. Here, QP is the amount that is produced by an unaffected (private) market.
However, the optimal social amount of production is QS. The difference exists because the negative
externalities are not included in the private costs but do account when calculating the social costs.
Because of the higher social price PS, we have a lower demand and thus lower production at QS.
Figure 4: negative externalities in Marchillan cross.
The Neoclassical economists have another view. They focus on both supply and demand, whereas
classical school only focussed on supply. Key terms in the neoclassical theory are:
- maximisation of profits and utility
- self-interest, which implies societal interest
- price mechanism prevents the exhaustion → scarcity is relative
- people are rational → homo economicus
- governments need to be small, because markets are efficient on their own.
A conflicting school on the neoclassical school is the study of behavioural economics. This is the
combination between psychology and economics that investigates what happens in markets in which
some of the agents display human limitations and complications. Key terms in the behavioural theory
are:
- bounded rationality
