MPE 781: Economics for Managers - Economics Assignment

Internal Code: MAS4152

Economics Assignment:

Most climate change models predict that a concentration of 550 ppm would be associated with a rise in temperature of at least two degrees Centigrade. A continuation of “business- as- usual” trends will likely lead to a trebling of CO2 by the end of the century, with a 50 percent chance of exceeding a rise of five degrees Centigrade, about the same as the increase from the last ice age to the present. The full consequences of such rises are not well known. Some of the direct effects are obvious: implications for agriculture (not all bad; productivity in Canada and northern Russia will rise, but negative effects predominate where moisture is the limiting factor and especially in the heavily populated tropical regions) and a rise in sea level, which will wipe out the small island countries (e.g., the Maldives or Tonga) and encroach considerably on all countries. Bangladesh will lose much of its land area; Manhattan could be under water. This rise might be catastrophic rather than gradual if the Greenland and West Antarctic ice sheets melt and collapse. In addition, temperature changes can change the nature of the world’s weather system. A reversing of the Gulf Stream, which could cause climate in Eu rope to resemble that of Greenland, is a distinct possibility. There is a good reason to believe that tropical storms will become more severe since the energy that fuels them comes from the rising temperature of the oceans. Glaciers will disappear, indeed have been disappearing, rapidly, and with them, valuable water supplies. Questions: 1) Motivate the reader to read the article by summarizing the key assumptions and main points. 2) According to Arrow, “We are much better to act to reduce CO2 emission substantially than to suffer and risk the consequences of failing to meet this challenge.” – in light of the article and based on your own research, please explain why he suggests so. Specifically, what sources of market failure are present? Apply the abstract possible solutions to this problem of global warming. 3) In this article, the consumption discount rate, denoted by ?, is defined as ? = ? + g?. What do the terms ? and g? represent? Explain the intuition behind this equation. One critique says that any kind of uncertainty regarding g may lower the value of ?. Do you agree or disagree with the critique? What are the implications for the economy of having a lower value of ?, when human-induced global warming is occurring? Explain. 4) Adam Morton, in his article titled “Energy crisis: Wholesale power prices have doubled since the carbon tax was axed” published in the Sydney Morning Herald (dated the 9th March 2017), has argued that the dramatic increase has been largely blamed on soaring gas prices and investment uncertainty over what power plants to build as age-ing coal generators shut down. If so then what are the implications regarding the value of ? for Australia? Explain. 5) In the equation, ? = ? + g?, assume that ? is determined by an action of a social planner. Consider the event when U.S. President Donald Trump withdrew the U.S. from the Paris Climate Accord on June 1st, 2017. What are the implications regarding the value of ? for the world? Explain.