Reminder: Deadlines

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Reminder: Deadlines. May 29: 4 page preliminary draft with references (of course) i.e. 2,000 – 3,000 words (received only from Layal) Marwa (June 5) and Mohamed: (June 3) June 12-June 15: final paper (10 pages) i.e. 7,000 – 9,000 words - PowerPoint PPT Presentation

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  • Reminder: DeadlinesMay 29: 4 page preliminary draft with references (of course)i.e. 2,000 3,000 words (received only from Layal)Marwa (June 5) and Mohamed: (June 3)June 12-June 15: final paper (10 pages)i.e. 7,000 9,000 wordsNote: 12 point times new roman font. 2 cm margin. No more than double space. Correct references. No plagiarism.

  • Final ExamJune 19, 11 2 pmComprehensive25% of your grade**

  • Assignment due todayFunctional income**

  • **

  • **GlobalizationChapter 18

  • **Globalization: efficient allocationIs free trade efficient?What are the conditions necessary for free trade?Large # of nearly identical firmsInformation relatively freely sharedStrong incentives to internalize costs

  • **Competition?Do we have perfect competition under globalization? Or do we have the power of transnational corporations with economies of scale?WTO rules: cannot promote natl small businessesGlobal mergers and acquisitions have been most intense in the areas of financial services and telecommunications those economic sectors in which WTO agreements have been completed

  • **Competition?If 40% of a given market is controlled by 4 firms, the market is no longer competitiveAgriculture: top 4 agrochemical corporations control 55% of global marketOf the 100 largest economic organizations, more than are corporationsSo where does the money go?1/3 of the commerce that crosses national boundaries does not cross a corporate boundaryIs there any reason that central planning should work better for a large corporation that it does for a nation?

  • **Information?There are patents and monopoliesGlobally: intellectual property rights are tied to tradeRemember the inefficiencies associated with patents: (1) information is a nonrival good; (2) patents = temporary monopoliesInternational patents - fairly recent (1947; 1980s)Know box 18.1

  • **John Maynard KeynesOne of the founders of the Bretton Woods Institutions

    Ideas, knowledge, art, hospitality, travel these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possibly, and, above all, let finance be primarily national.

  • **Internalizing cost?Are producers paying the costs of production? Are they producing to the point where marginal costs are just equal to marginal benefits? Are they internalizing costs or leaving them as externalities?What is the goal of the WTO?To increase economic growthTo increase the transport of goods between countriesSignificant externalities here plusWTO can over-ride national laws if declared a barrier to trade

  • **Enticements? standards lowering competitionRace to the bottomCompetitive advantage in international tradeMore of world production shifts to countries that do the poorest job of counting costs (thus reducing efficiency of global production)As externalized costs , +ive correlation between GDP growth and welfare Solution?Harmonization of cost-accounting standards across countries -> no incentive for mobile capital to moveOr measure costs according to national and not international values

  • **Other consequences of globalizationSpecialization range of choices to earn a livelihood decrease; emigrationRange of choice in earning ones income ignored; range of choice in spending ones income exaggerated Sustainable scale a successful trade regime will lead us beyond KCan we learn from our mistakes?

  • **Just (equal) DistributionProponents: world free of poverty (goal of WB)Absolute disadvantageStandards lowering competition and laborFood security and free trade in agriculture (your readings)

  • **Absolute disadvantageCapital mobility. $ will flow to where ever there is an absolute advantage of productionConsequence? Evidence? most developing countries have failed to raise their per-capita incomesIn the 3 decades prior to 1996, the share of income received by the worlds poorest 20% fell from 2.3% to 1.4% while the share going to the worlds richest 20% increased from 70% to 85%. Relative not absolute income. Average increase in per-capita income from 1989 to 1999 for the 15 poorest countries: decreased by an average of 5.5%; w/o war, a 3.2% decrease; wealthiest countries: increase of 15.5%

  • **We live together on a finite planetSo?Increase in income in wealthy countries fueled by nonrenewable resource consumption (and nonsustainable depletion of potentially renewable resources)Can revenue from nonrenewable natural resource extraction be defined entirely as income?No. Why not?Income = amount you can consume in one period w/o affecting your ability to consume in subsequent periods

  • **Food security and free trade in agriculture: Threat in two ways(1) Market system provides goods and services to those who have the money to purchase them. Thus: poor citizens of LDCs will be competing with rich citizens of ODCs for food. Why are there famines?Famines are the result of a lack of entitlements to food not a lack of food If agricultural markets are completely liberalized easy to imagine Western nations importing food for their cattle from nations suffering from famine(2) Farmers are typically the most disadvantaged group in many LDCs. LDC costs of agricultural production tend to be higher than those of large agro-industrial farms in ODCs. So? Liberalization => lower food prices in LDCs. Result for farmers, the poorest group?

  • Chapter 20: General Policy Design Principles

  • Policy requires2 philosophical presuppositions: (1) nondeterminism (real alternatives); (2) nonnihilism (real criterion of value to guide our choices)Plus6 general design principles(yes, I want you to know these 6 principles and the 2 presuppositions)

  • (1) Economic policy always has more than 1 goal; each independent policy goal requires an independent policy instrumentOnly 1 goal => technical problem, not economic3 basic goals in e.e.: sustainable scale, just distribution, and efficient allocationfor every independent policy goal, we must have an independent policy instrument (Jan Tinbergen)With only one instrument: forced to choose between efficiency or equity

  • (2)Policies should strive to attain the necessary degree of macro-control w/ the minimum sacrifice of micro-level freedom and variabilityWhat does that mean?What is limited?Eg: capacity of the atmosphere to absorb carbon dioxide; capacity of the environment to sustain x# of people; consequently?In general opt for the least mirco-restrictive way of attaining the macro-goal

  • (3) Policies should leave a margin of error when dealing with the biophysical env.Uncertainty irreversibility -> safety marginExample?

  • (4) Policies must recognize that we always start from historically given initial conditionsNo blank slatePresent institutions reshaped Can they be abolished?

  • (5) Policies must be able to adapt to changed conditionsChange is an ever-present realitySome policies may differ in implementation than in theoryAdaptive management changing our policies as conditions change and as we learn moreEco eco

  • (6) Domain of the policy-making unit must be congruent with the domain of the causes and effects of the problem with which the policy dealsPrinciple of subsidiarity -> deal with problems at the smallest domain in which they can be solvedProblems addressed by institutions on the same scale as the problem

  • Which policy instrument for which goal?3 basic goals so we need 3 basic instrumentsGoal of efficient allocation instrument of the market (for excludable and rival goods)Goal of sustainable scale social or collective limit on aggregate throughputGoal of distributive fairness -> socially limited range of inequality imposed on the marketIn the sequencing of policy instruments, the market comes thirdSo: scale (1st); distribution (2nd); efficiency (3rd)Why?

  • Controlling throughputAt which end of the throughput flow should we impose macro-level constraints?Restrictions at the output end (pollution)Restrictions on the input flow from nature (depletion)Outflow may be more easily controlled by limiting the inflowStill cannot ignore outflow

  • Price vs. quantity as the policy variable2 ways to limit throughput: (1) raising prices through taxation to reduce demand; (2) limiting quantity directly through quotas and letting prices adjustWhat are the effectiveness of these approaches? Do we try to control quantity and let the market determine price, or control price and let the market determine quantity?Remember: demand curves are uncertain and shift. -> where is it least painful to experience errors, as price changes or as quantity changes?

  • Source vs. SinkSources generally owned; not sinksDirectly controlling sources involves more interference w/ existing property rights than controlling sink accessHow to reconcile the principle of intervening at the depletion w/ the difficulty of private property rights? Revolution? Property as a bundle of rights? scale of extraction is limited, no longer a free goodOr market in sink permit, capped at an aggregate scaleOr fix prices through taxes and allow the market to set the corresponding quantity. Tax administrative simplicity

  • Policy and Property Rightspolicy is concerned w/ creating, redefining, and redistributing property rightsRemember..Property rights and excludability are not inherent properties of goods and servicesProperty rights are a 3-way relationship between 1 individual, other individuals, and the state3 types of property rights:->property rule->liability rule (free to interfere but must pay compensation)-> inalienability rule

  • **Remaining Chapters. Chapter 21: Sustainable ScaleChapter