Lecture #2 - Growing Population and Economic Growth

The Economic System

Starting with Physics

• First Law of Thermodynamics - "The change in the internal energy of a closed thermodynamic system is equal to the sum of the amount of heat energy supplied to or removed from the system and the work done on or by the system."
  • Energy is neither created or destroyed
• Second Law of Thermodynamics - "The total entropy of any isolated thermodynamic system always increases over time, approaching a maximum value."
  • To do work, there has to be an energy difference. 
  • Entropy means energy differences equalize over time.
  • Example - you place a hot cup of coffee on your desk.  The room's temperature and coffee's temperature equalizes.  The room is slightly, slightly warmer while the coffee is colder
    • The energy is still there from the first law
• Economic activity like production, consumption, transportation, etc. all use energy and resources from the environment. 
  • Everything comes from the environment
  • Examine the graph:

• Humans extract resources and energy from the environment
  • Humans use resources and energy to produce goods and services
  • Then humans consume these products
  • Each human activity generates wastes and energy that is returned to the environment
• Human activities could do the following:
• Resource depletion - humans extract more resources than can be replenished
  • Example
    • Humans extract water and supply it to cities
    • Many cities are extracting more water than the amount being replenished by rainfall
• Pollution - human activities that degrade the environment or resource base
  • Example
    • Humans emit sulfur dioxide from burning of coal.
    • The Sulfur dioxide turns into acid rain, which damages forests and lakes.
      • Acid rain depletes minerals from the soil and raises the ph of water, killing the fish
• Environment does have a sink capacity
  • Sink capacity - the environment can handle a level of pollution or waste with minimal impact.
    • Once the pollution or waste exceeds the sink capacity, then it damages the environment.

• What factors drives this model?
  1. Population growth - more people consume goods and services
     • Demands for resources and energy increases
     • More wastes and waste energy is produced
  2. Economic growth - society produces more goods and services
     • Each person consumes more goods and services
     • More wastes and waste energy is produced
• Be careful
  • Technology and institutional arrangement impact the amount of resources, energy, and waste that humans produce
  • Last 10 years, people in the United States recycle more
    • Glass bottles, aluminum, paper, plastics, etc are recycled
  • New institutions and arrangements had to be developed
    • Bins and collection centers where people can dispose of their wastes
    • Recycling centers that separates the types of waste
    • Industries adjusting their production processes to include recycled materials
    • New transportation vehicles for recycled wastes
  • Traditionally, metals have always been recycled like copper
    • Nobody throws away silver and gold
  • Market prices exist for recycled materials
  • Be careful!
    • Recycled materials do not mean it is cheaper
    • Costs money for recycling centers, sorting, machines, equipment, and transportation
      • Some claim recycling makes products and services more expensive
      • You have to compare the cost of recycling the material to extracting the material from the environment.
    • High-income countries like United States and Europe are big recyclers
      • More is said later in the Environmental Kuznet's Curve

Population Growth

• More people put more pressure on the environment
  • Primary energy consumption increased globally by 4.3% in 2004
  • As much as 60% of the global population depends on the waters of international fresh water systems
    • Rivers and lakes of which basins are shared by more than two countries
    • Predicting fresh water shortages
    • Could have more wars and conflicts over fresh water

Graph below shows how fast the world's population is growing

• The developed world is 75% urban
  • The rate is accelerating in the developing world
  • By 2030 urban population is expected to rise to five billion or 60% of the world’s population
• Sources - U.N. Population Division report World Urbanization Prospects: 2003 Revision; BP Statistical Review of World Energy June • 2005; GEO Year Book 2006; WRI 2005
• The prediction has a problem
• Population growth rate has been slowing and is shown below

• Why is population slowing?
  • Children are expensive in both money and time
    • Developed countries have close to a zero population growth rate
      • People delay having children
      • Complete an education
      • Accumulate assets like a house, car, etc.
    • Much of the population growth is in developing countries
      • HIV is impacting population growth rates in some African countries

• Now we see why Mathusian ideas keep coming back
  • Population growth is taken as, P_t = P_oe^rt
    • P is population, r is growth rate, and t is time
      • Net growth is birth rate – death rate
  • Paul R. Ehrlich wrote The Population Bomb in 1968
    • A best seller
  • Disastrous predictions for resources and environmental degradation
    • Running out of petroleum
    • Killing off all the fish (over harvesting)
    • Many species are going extinct
  • Biologist use a logistic growth function for species
    • It is an upside down "U-Shape"
    • Example - yeasts
      • Add yeasts to a juice, wort (i.e. before beer is beer), or sugar solution
      • The yeasts rapidly multiply, consuming the sugar
        • Ethanol and carbon dioxide are waste products
      • Eventually the yeast population reaches a peak and then population declines
        • As ethanol reaches about 12%, the yeast dies in their wastes
    • Many examples of this in biology 
  • Environment has a carrying capacity
    • The level of population a natural resource base can sustain without depletion, whether is be humans or animals
    • Once the population passes the threshold of the carrying capacity, then population declines.
    • Population is depleting the resources

• More people consume more goods and services
• Economics
  • Demand function - relationship between a market price and quantity demanded by the consumers
    • Law of Demand - a higher market price means consumers reduce their quantity demanded
  • Supply function - relationship between a market price and quantity supplied by the producers
    • Law of Supply - a higher market price means producers want to increase their quantity supplied
  • A market brings these two behaviors together
    • Market price and quantity are shown below:

• Market is stable
  • If price is higher than market price of $2
    • Market has a surplus
    • Producers are supplying more than what consumers want
    • Producers lower the price until the price is $2 again
  • If price is lower than market price of $2,
    • Market has a shortage
    • Consumers want more than what producers are supplying
    • Producers raise the price until it is $2
• Market has many assumptions
  • Lectures 3 and 4 we will discuss market failures
• Why do some markets have a perpetually shortage or surplus?
  • Government is intervening with the market price
• Why is demand and supply important?
  • Higher population means more people, and thus, more consumers
  • Demand shifts to the right
  • Market price and quantity both increase
  • Producers increase their quantity supplied

• Humans have market prices for their goods and services
• High market prices cause
  1. Industries expand to the higher demand and price
     • More suppliers enter the market
     • Supply shifts right
     • Market price falls
     • The price drop depends on industry and its long-run cost
  2. More products are supplied to market
     • More resources are located and extracted
     • More waste are generated
  3. Spurs technological progress
• If many industries are expanding within a country, then we have economic growth

Economic Growth

• Macroeconomics
  • Gross Domestic Product (GDP) - the traditional measure of macroeconomic performance
    • GDP is the sum of the money values of all final goods and services produced in a country during a year.
      • Does not include sales of intermediate goods and services
      • Only includes products and services produced within a country
      • Does not include voluntary work
      • Does not include degradation to the environment
      • Does not include depletion of resources
        • Depleting a stock of natural resources (e.g. oil, minerals, forests) increases GDP
        • Used in production of goods and services
        • Future generations could be hurt
          • Less petroleum or no forests if they are cut down
• Economic growth -increases in GDP
  • Usually GDP per-capita output
    • Per capita is per person
    • A higher GDP per capita means each citizen has more goods and services
    • Thus, population is important.
  • Picture below shows GDP percent-growth rate in 2007
    • Before the 2008 Financial Crisis

• Derivation of a Growth Model
  • Total production of goods and services in a country are treated as one large production function for whole economy
  • Common in growth theory

• Variables are
  • GDP at time t
  • A is autonomous growth
    • Reflects technology, usually the intercept in a regression equation
  • K is capital
  • L is labor
  • E is for energy
  • R is for natural resources
  • Usually equation has E or R, but not both
    • Petroleum or coal are resources that society derives energy from
• Is economic growth good or bad for the environment?
  • More growth means GDP is increasing
  • Requires more resources and energy
  • Technology can change A too, creating an offset!
• If government imposes restrictions on natural resources or energy use, then regulations put restrictions on natural resources, R, or energy, E.
  • Companies could adjust capital, K, or labor, L, but restrictions would most likely lower GDP growth
  • Technological progress could increase A also
• It is difficult to measure impacts of regulations on resources, environment, and GDP
  • Example
  • Government imposes a regulations to reduce air pollution in a city
    • Causes higher costs
    • People may be healthier
      • Live longer, work harder, pay less money for medical problems, etc
  • Thus, regulations slow GDP down initially, but healthier people make GDP grow faster.

The Environmental Kuznet's Curve

• Kuznet's curve is a hypothesized relationship between environmental degradation and income per capita.
  • The shape of the relationship is an upside down U-shape.
    • The shape is estimated as a quadratic, E_t=f(GDP, GDP²), where E is pollution emissions at time t per capita and GDP per capita.
    • When income per capita is low, a country does not invest in pollution abatement.
    • As income per capita increases, a country invests in more pollution abatement.

• Examples:
  • Society goes through transitions from agricultural to heavy industrial, which increase pollution.
  • Over time, heavy industrial is replaced with services and light industrial, which generates less pollution.
  • Environmental regulations can strengthen over time as country develops.
  • Higher income allows more investment in pollution equipment.
    
  • Country goes through deforestation and then afforestation.
    
• Criticism
  • Some pollution levels increase at a decreasing rate.
    • Carbon dioxide emissions
      • Technology reduces a car engine's CO2 emissions
      • Higher incomes means more people buy cars
  • One possible reason for the problems of finding the Kuznet curve is the process of learning. 
    • As developed countries develop pollution abatement technologies, developing countries can implement these technologies at a faster rate, which give different estimates of the Kuznet curve. 
    • Latecomers had the advantage of learning from other nations' environmental policies.
      • They learn what works and does not work
    • This is a technological leader-follower model. 

Japan's History of Environmental Policy

• Early concerns  about damage from copper mining arose in 1868
• Government did not pay serious attention to the environment until after World War II.
  • United States helped re-develop their country 
• National economic development was the central government’s top priority.
  • Pollution was viewed as a local government problem.
• Rapid growth in the 1950s led to increases in pollution.
• 1958
  • Japan had disease outbreaks from water pollution
  • The National Diet passed two water quality laws in 1958
    • The first laws at the national level.
• Before hosting the Tokyo Olympics in 1964
  • International pressure to improve water quality in the Sumida River in Tokyo.
  • Japanese government created the Pollution Control Division of the Ministry of Health and Welfare (1964) and the Basic Law for Environmental Pollution Control (1967).
• Recently, Japan has focus policy focus shifted to global issues.
  • Kyoto Protocol - reduce greenhouse gas emission to slow down global warming
  • Japan is now focusing on “quality of life” issues.
• Not mentioned
  • Since the early 1990s, the Japanese economy entered into two decades of sluggish growth
    • Real estate prices are still dropping and economy has weak growth

China's History of Environmental Policy

• Mao Zedong declared in 1949 that pollution was a capitalist problem that did not exist in socialist countries.
• In 1972, water pollution began to attract the government’s attention
• Environmental Protection Law passed in 1979.
  • The Constitution stated that protecting the environment was the responsibility of the state.
  • Polluters should be held responsible for pollution treatment, including a polluter pays fee system.
    • Government has lack of resources
    • Local governments focus on growth
      • More factories, more jobs, more income, and more taxes
      • Local governments opened illegal coal mines and built electric power plants without the national government's approval
• The Olympics were held in China in 2008
  • China was embarrassed about the green water off of Shanghai
  • Some Olympiads wore gas mask in Beijing because of the high air pollution levels
  • Maybe the Chinese government will add more environmental laws

The Developing World

• The developing world
  • Have higher population growth rates
  • Moving from agrarian societies to industrialized societies, which results in more pollution.
  • Increasing urbanization
    • People are moving to the cites, because that is where the jobs are
      • Same thing in the United States and Kazakhstan
• Potential Problems
1. Urbanization - environmental problems become problems when people are close together, so that their actions affect others nearby.
   • The infrastructure to support increased populations is lacking in many cities.
     • Fresh water, collecting and treating waste water, solid waste disposal, etc.
2. Weak governance
   • Not only are regulations often weaker, but the government may not enforcement compliance.
3. Corruption and lack of democracy are also problems.
4. Lack of information/education
   • Educated people (in the United States) are pro-environment
     • Encourage environmental regulations
5. Developing countries have wide spread poverty
   • Leaders emphasize economic growth
     • Place less weight on future considerations like environmental damage or resource depletion
   • Developing countries may use less efficient technologies
     • They could buy the old equipment and machines used in developed countries
• Less efficient machines use more energy and resources
• Benefits
  • If they become high-income societies, then they may invest in green technologies or replenish renewable resources
  • Population growth rate slows down
  • However, high-income societies use more resources and produce more pollution such as carbon dioxide.
• Leakages - not in many introductory courses
  • United States - environmental laws became too harsh
    • Compliance costs were too high
    • Some industries relocated to countries like Mexico and China
      • Weak environmental laws
      • Cheaper labor
    • These industries pollute even more shipping their products to the United States
    • High U.S. incomes are indirectly creating large amounts of pollution
  •  I think this happened to Japan too
    • Japan started to outsource the production of goods and services to other Asian countries.
    • Japan was big investors in other countries like China, South Korea, etc.
  • Some countries activity seek out companies, trying to get them to invest in their economies
    • Creates jobs, incomes, economic growth, and more tax revenue