MPE 781 Economics For Managers


Assignment Overview

Arrow, in 2011.

Summarize the key assumptions and major points to encourage the reader’s attention.

Arrow states that it is much better to act quickly to reduce CO2emission than to wait and suffer the consequences of not meeting this challenge.

Please, based upon the article and your own research, explain why Arrow suggests this.

Which market failures are most likely?

The abstract solutions to the problem of global heating are available.

This article denotes the consumption discount rate as = + g.

What does the g and terms mean?

This equation is based on intuition.

One critic states that any uncertainty regarding g can lower the value of.

Is this criticism correct?

Is it possible to have a lower value for, when there is human-induced global heating?

Adam Morton, in an article entitled Energy crisis: Wholesale power price have doubled after the carbon tax was abolished” published by the Sydney Morning Herald on March 9, 2017, argued that the rapid increase in wholesale power prices can be largely attributed to rising gas prices and uncertainty over which power plants to build when the old-fashioned coal generators are shut down.

What are the implications for Australia’s future value of the carbon tax?

Consider the equation =+g as a result of a plan by a social planner.

Think about the U.S. President Donald Trump’s decision to withdraw the U.S.A from the Paris Climate Accord. This was on June 1, 2017.

What is the impact on the value of the planet?


The phenomenon of global warming has been one of most troubling and worrying issues at a global level over the past decade.

Global warming is simply an increase in earth’s average temperature at a rate that is faster than normal.

While this phenomenon isn’t widely recognized, it has been noticed in recent years and is causing great concern among global leaders as well as environmentalists worldwide, because of the short and long-term risks it presents.

The long-term risks include drastic changes in global temperatures, which could lead to an overall shift in demography and the environment, threatening the lives of animals, plants, as well as humans (Fankhauser 2013).

Many people believe global warming has been caused by many factors, including human activities over time.

The largest and most harmful of these activities have been the uncontrolled and massive emissions of greenhouse gases such as carbon dioxide, methane, and others. These effects have been increasing to a significant extent over the last century.

Based on Kenneth J. Arrow’s 2007 article on Global Climate Change, the concerned report provides a detailed overview of this topic and attempts to analyze and answer several important questions.

Kenneth J. Arrow’s article has been critically analyzed and discusses the negative and positive effects that global warming and an increase in temperature have on the earth.

The article discusses the potential cost that the increased pace of global warming will have on humankind and other life forms.

There have been many disagreements and confusions over the amount and timing of this cost.

The author, however, attempts to prove that there is global warming with empirical evidences.

He also discusses how it is necessary to reduce carbon dioxide emission to very high levels in order to prevent future catastrophes that are highly likely to occur if current levels of emissions continue (Arrow 2007, 2007).

The article explains that global temperature increases are largely caused by trace gases found in the earth’s atmosphere.

These trace gases, which are mostly composed of methane, carbon dioxide and water vapor, have the unique property of absorbing radiations at low frequencies and thus getting heated up.

The amount of CO2 in the atmosphere has been increasing steadily, even more so post-industrial revolution. This, along with rising temperatures worldwide, has had significant impacts (mostly detrimental) on sea-levels and other life forms such as crops, vegetations, climate, climate, and climate.

To calculate the impact of taking CO2 emission reductions in the near future, we used the cost-benefit method (Trenberth et. al. 2014).

This article is written by the author to advocate for immediate restrictions on uncontrolled greenhouse gas emission, primarily carbon di0xide, which are being produced worldwide, especially in industrially developed nations.

These measures are required by law to avoid the negative effects of global warming.

Arrow suggests that there are both short and long term implications.

The author explains the reasons in detail in the section below.

Global leaders, scientists, and environmentalists have over time unanimously accepted the fact that the main cause of global warming was the increase in greenhouse gases (especially carbon dioxide) from the very beginning of human existence.

These greenhouse gases, which are one of many components of the trace gas, have greatly increased the quantity of trace gas present in the earth’s atmosphere (Seinfeld & Pandis (2016)).

Due to their unique ability of absorbing radiations from low frequencies, trace gases have been responsible for the rapid heating of the earth.

Human activities have been a major contributor to the increase in carbon dioxide emission, especially over the last few hundred years.

These levels have dramatically increased since the Industrial Revolution.

These levels have significantly risen with the passage of time (Lau & Lee, 2012).

The following graph illustrates the changes in carbon dioxide emissions over time:

Figure 1: Carbon Dioxide emissions globally

The above graph shows that emissions have increased substantially since the Industrial Revolution period. It can be seen that emissions rose dramatically from 1851 to 1951, and that they continued to rise after 1951.

The next century saw carbon dioxide emissions reach a dangerous level of 8000 million tonnes (Bondyrev Davitashvili, Singh, 2015).

This dramatic increase in CO2 levels has, in turn, contributed to the unusually high global temperatures over the last few centuries. It created a greenhouse-like effect on the earth’s atmosphere (O’Neill et al. 2012).

Here’s a graphic that shows the direct link between global temperature rise and CO2 levels in the atmosphere.

Figure 2: Relationship of temperature and levels of CO2 overtime

The above graph clearly shows that both variables have a positive direct correlation, which supports the author’s theories.

Arrow has shown that this data supports his concern and makes it a priority to take the necessary actions against it (Friedlingstein, et al. 2013, 2013).

A lot of research was done on this topic and some shocking results were received. These show that CO2 emissions rose dramatically from 280ppm (parts/million), in the period before the Industrial Revolution to 430ppm after the revolution.

Reports indicate that the levels of CO2 emissions could rise up to 550ppm (2035), depending on the pace and activities.

The projected levels of emissions are nearly twice the level of levels that existed before the advent of industrial activities.

These levels, if they are ever received, will be the highest in the last few million years.

These alarming statistics represent a serious threat for humanity’s existence in the future, if it is not reduced or controlled (Cook and al., 2014.).

Along with significant support from other research, the article suggests that the steadily rising levels of carbon dioxide emission have substantial and direct consequences for the average global temperature.

The global average temperature is likely to rise by at most 2oC as a result of the projected rise in carbon dioxide emissions.

This emission pattern, if it is not corrected, could lead to a five-degree increase in the global average temperature by 2100.

The melting of glaciers is one negative consequence of global warming and the emission of greenhouse gases. This causes sea levels to rise as you can see in the following graph.

Figure 3: Sea level changes over time

The alarming rise of sea levels has been observed mainly between the fifteenth- and twentieth centuries. It is likely to increase faster and more if current trends of global warming, melting glaciers and global warming continue.

This is a serious threat to many of the most populous landmasses. It also includes large land areas in low-sealevel countries like Bangladesh.

Manhattan and other cities are at risk of being erased from the globe’s geographical map forever.

Greenland’s two largest glaciers and West America’s are also at risk of melting. This could cause even more destruction and property loss, and possibly lead to a greater catastrophe (Hansen 2016).

The increase in global temperature is expected to have an impact on global climatic patterns.

The current rate of global warming will likely change the climatic conditions that are currently in Europe and similar countries to Greenland’s.

Humankind will also be affected by the increasing frequency and magnitude of tropical storms.

Rapid melting of huge glaciers and a decrease in their reserves could lead to an immediate shortage of drinking water around the world (Bondyrev Davitashvili and Singh, 2015).

Collectively, all these consequences pose threats to the survival and future existence of life forms on Earth.

These projections have created a lot of concern and tensions around the world, and they are predicted to be causing a lot of disaster.

Appropriate design and implementation of corrective and adaptive measures on a global basis has become a matter a great priority and necessity.

Source of Market Failure:

A market failure can be described as an economic phenomenon in which the welfare of the entire society is not maximized by a particular market structure.

This is a relevant issue.

According to data and statistics from various researches and studies worldwide, carbon dioxide emissions have increased dramatically since the Industrial Revolution began.

The only few developed countries today have made the greatest gains from the industrial revolution. They were on a growing trajectory during this period (Rezai Foley & Taylor 2016).

These countries were able to grow and prosper economically and took them on a path of sustainable growth. As you can see from their performance today.

The uncontrolled emission of carbon dioxide from these countries was a result of this economic growth (Emanuel (2012)).

The subsequent generations bear the brunt of these activities.

The growth and prosperity of the developed countries came at the expense the development of the developing nations, who were confronted with anti-growth policies in an effort to reduce their greenhouse gas emissions.

These policies had a major impact on their economic prosperity and kept them poorer and less developed.

The result is that the cost of economic growth in the developed countries was not borne entirely by them. Instead, the more developed countries incurred the cost of global well-being and growth.

This can be characterized as a source or market failure in this part of the global situation (Rezai Foley & Taylor 2016).

Global Warming: Solutions

To slow down global warming or limit its effects to the present level, there are many measures that can be taken to help reduce carbon emissions.

Here are some examples:

a) It is possible to reduce the carbon emissions by replacing fossil fuels like coal and other high-carbon emitting energy resources with natural gases (Emanuel (2012)

b. Global warming is a result of massive deforestation, which has been largely caused by human activity over the past few decades.

Trees can help reduce CO2 levels so they should be planted in large numbers all around the globe to combat global heating (Pachauri, et al. 2014).

c. Energy consumption. Reducing production techniques is a necessity. They should also be used globally to reduce energy consumption.

This innovation and implementation must be considered by both developed and developing countries (Seinfeld & Pandis 2016).

d. The Industrial Revolution has brought substantial benefits to the developed countries.

They have to take the necessary steps to control carbon emissions so they can encourage others (Lau Lee & Mohamed (2012)).

These equations are used to show the inter-temporal preferences in consumption.

d = R+ge

In this equation, the term d is the discount rate for consumption.

This is the rate at the which an individual discountes future losses if they prefer to consume in this period.

This represents the general preference pattern for an individual in current and future.

This value is higher than the Sen, 2013, which indicates that an individual prefers to consume less in current to future periods.

This equation uses the term “r” to indicate time preference.

Higher values mean that individuals are more inclined to prioritize their current welfare over their future welfare.

The term “g” indicates the expected rate of growth in average consumption. The term “e” indicates the change in social weight.

This is the economic concept of marginal utility, which is when consumption levels rise (Goulder & WILLIAMS II, 2012).

Figure 4: The Social Cost of Carbon and the Global Discount Rate (2010)

Economic intuition

The equation suggests that there are two factors that contribute to the consumption discounts rate.

Rate has a positive correlation with the time preference variable, as people are more likely to value current consumption over future consumption.

Remember that ge refers to the change in the value d due to an increase or decrease in consumption. (Sen, 2013).

According to the critique, uncertainty in the values for g causes a decrease in the consumption discount.

This is not true, as current consumption has a higher importance than future consumption when there is high uncertainty about the consumption growth rate.

In general, however, it is possible that the criticism might not reflect the truth of the relationship (Cropper, et al. 2014).

A country with a low value for the consumption discount rate in the above scenario means that they prefer future consumption more than their current preference rate.

This indicates that future consumption is also important for the country’s citizens.

An economy that is concerned about aggravated climate change and its potential adverse effects will likely take proactive steps to reduce carbon dioxide emissions in order to protect their future well-being.

They can be expected help pave the way for sustainable development and inspire others to sacrifice some of their current welfare in order to make a better future (Cropper, et al. 2014).

Adam Morton writes that Australia’s power prices have almost doubled in the wake of the repeal of carbon tax.

Numerous evidences back their conclusions, which indicate the same phenomenon.

As a result, the cost of electricity has risen.

This can be attributed in large part to the rising prices for gas and uncertainty regarding the future of the power sector.

This is due in part to investors’ doubts and speculations regarding the future power plants.

Investors are worried about these plants, which are expected to replace coal factories in the near future. However, they are also concerned about their credibility ( 2017, 2017).

The article shows how, even though Australia acknowledges the need reduce carbon dioxide emissions for future welfare and has given up on its ambitious target to decrease non-renewable energies use by 50%.

This implies indirectly that, in light of the massive rise in electricity consumption prices, the consumption discount rates of Australians is likely to increase.

This means that residents are unlikely to agree to sacrifice their future welfare in exchange for a rise in gas prices.

If current price trends are maintained, it is possible for there to be an increase in demand for traditional nonrenewable sources of energy (Meng Siriwardana and McNeill, 2013).

Figure 5: Price changes in Australia

As mentioned above, the trend can also be explained in terms general human behavior patterns. Human beings value current welfare more than future well-being due to greater uncertainties about future consumption and welfare levels.

The majority of people are very risk-averse, with a few exceptions.

This could indicate that there may be a behavioral trend similar to this.

This article shows that the uncertain outlook and low profit potential of power plants could be responsible for the uncertainties in investments in this sector.

All of these factors can lead people to rely on non-renewable, carbon-emitting energy sources for their future welfare ( 2017, 2017).

In this article, the term “r”, which is the time preference variable denotes the tradeoff of future and current preferences.

This variable is more important than its value because it determines how much an individual prefers to consume now over future consumption.

This means that a country with a high time preference will lead to a higher discount rate of consumption. This indicates that it is more concerned about its current welfare and less about future generations (Friedman 2016).

The United States of America’s withdrawal from the Paris Climate Accord could be correlated with the discussion above and is expected have significant impacts on the global environment conditions (Bodansky 2016).

Table 1: Average discount rate over the years

The USA was and remains one of the largest global emitters of carbon dioxide.

It is responsible for almost 25% of all carbon dioxide emissions in the world. This indirect indicator suggests that the actions and strategies of the USA directly affect the fate of the rest of the world’s carbon emissions and global climate change.

In this context, withdrawal of the country may mean that there will not be as many restrictions or limitations placed on the country in relation to carbon emission (Friedman 2016).

This could raise the value r as residents naturally will choose their current welfare over their future welfare.

This can increase the consumption discount of the country and cause an upward pressure on the global rate.

If the global value for d rises under the influence of the USA, this can make global warming more likely (Raupach, et al. 2014).


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