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

Note: 12 point times new roman font. 2 cm margin. No more than double space. Correct references. No plagiarism.

Final Exam

June 19, 11 – 2 pm Comprehensive 25% of your grade

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Assignment due today

Functional income

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Globalization

Chapter 18

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Globalization: ‘efficient allocation’

Is free trade ‘efficient’? What are the conditions necessary for

‘free trade’?

1. Large # of nearly identical firms

2. Information relatively freely shared

3. Strong incentives to internalize costs

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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 nat’l small businesses Global 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

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Competition?

If 40% of a given market is controlled by 4 firms, the market is no longer competitive

Agriculture: top 4 agrochemical corporations control 55% of global market

Of the 100 largest economic organizations, more than ½ are corporations

So where does the money go? 1/3 of the commerce that crosses national boundaries

does not cross a corporate boundary Is there any reason that central planning should work

better for a large corporation that it does for a nation?

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Information?

There are patents and monopolies Globally: intellectual property rights are tied to

trade Remember the inefficiencies associated with patents:

(1) information is a nonrival good; (2) patents = temporary monopolies

International patents - fairly recent (1947; 1980s) Know box 18.1

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John Maynard Keynes

One 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.’

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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 growth To increase the transport of goods between countries

Significant externalities here… plus WTO can over-ride national laws if declared a barrier to

trade

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Enticements? – standards lowering competition

Race to the bottom Competitive advantage in international trade More 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 move Or measure costs according to national and not

international values

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Other consequences of globalization…

Specialization range of choices to earn a livelihood decrease; emigration

Range of choice in earning one’s income ignored; range of choice in spending one’s income exaggerated

Sustainable scale a ‘successful’ trade regime will lead us beyond K

Can we learn from our mistakes?

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Just (‘equal’) Distribution

Proponents: “world free of poverty” (goal of WB)

Absolute disadvantage Standards lowering competition and

labor Food security and free trade in

agriculture (your readings)

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Absolute disadvantage

Capital mobility. $ will flow to where ever there is an absolute advantage of production

Consequence? Evidence? most developing countries have failed to raise their per-capita

incomes In the 3 decades prior to 1996, the share of income received by the

world’s poorest 20% fell from 2.3% to 1.4% while the share going to the world’s 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%

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We live together… on a finite planet

So? 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

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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 requires…

2 philosophical presuppositions: (1) nondeterminism (real alternatives); (2) nonnihilism (real criterion of value to guide our choices)

Plus 6 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 instrument

Only 1 goal => technical problem, not economic 3 basic goals in e.e.: sustainable scale, just

distribution, and efficient allocation “for 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 variability

What 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 margin

Example?

(4) Policies must recognize that we always start from historically given initial conditions

No blank slate Present institutions – reshaped Can they be abolished?

(5) Policies must be able to adapt to changed conditions

Change is an ever-present reality Some policies may differ in

implementation than in theory Adaptive management changing

our policies as conditions change and as we learn more

Eco 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 deals

Principle of subsidiarity -> deal with problems at the smallest domain in which they can be solved

Problems – addressed by institutions on the same scale as the problem

Which policy instrument for which goal?

3 basic goals – so we need 3 basic instruments Goal of efficient allocation instrument of the

market (for excludable and rival goods) Goal of sustainable scale social or collective limit

on aggregate throughput Goal of distributive fairness -> socially limited range

of inequality imposed on the market In the sequencing of policy instruments, the market

comes third So: scale (1st); distribution (2nd); efficiency (3rd) Why?

Controlling throughput

At 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 inflow Still cannot ignore outflow

Price vs. quantity as the policy variable

2 ways to limit throughput: (1) raising prices through taxation to reduce demand; (2) limiting quantity directly through quotas and letting prices adjust

What 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. Sink

Sources – generally owned; not sinks Directly controlling sources involves more interference w/

existing property rights than controlling sink access How 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 good

Or – market in sink permit, capped at an aggregate scale Or fix prices through taxes and allow the market to set the

corresponding quantity. Tax – administrative simplicity

Policy and Property Rights

“policy is concerned w/ creating, redefining, and redistributing property rights”

Remember.. Property rights and excludability are not inherent

properties of goods and services Property rights are a 3-way relationship between 1

individual, other individuals, and the state 3 types of property rights: ->property rule ->liability rule (free to interfere but must pay

compensation) -> inalienability rule

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Remaining Chapters.

Chapter 21: Sustainable Scale Chapter 22: Just Distribution