Topic+3+-+Economic+Issues


 * 10.3 HSC Topic Three — Economic Issues**

25% of indicative time The focus of this topic is the nature, causes and consequences of the economic issues and problems that can confront contemporary economies.

Outcomes

A student: H1 demonstrates understanding of economic terms, concepts and relationships H2 analyses the economic role of individuals, firms, institutions and governments H4 analyses the impact of global markets on the Australian and global economies H7 evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments H9 selects and organises information from a variety of sources for relevance and reliability H10 communicates economic information, ideas and issues in appropriate forms H11 applies mathematical concepts in economic contexts H12 works independently and in groups to achieve appropriate goals in set timelines.

Content

Students learn to:

• identify and analyse problems facing contemporary and hypothetical economies • examine the arguments for and against increasing economic growth rates • investigate the economic and social problems created by unemployment • analyse the adverse effects of inflation on an economy • analyse the effect of a continued current account deficit on an economy • investigate recent trends in the distribution of income in Australia and identify the impact of specific economic policies on this distribution • analyse the economic and social costs and benefits of inequality in the distribution of income • examine the economic issues associated with the goal of ecologically sustainable development • use the tools of economics to analyse a contemporary environmental issue
 * Examine economic issues**

• calculate an equilibrium position for an economy using leakages and injections • determine the impact of the (simple) multiplier effect on national income • explain the implications of the multiplier for fluctuations in the level of economic activity in an economy • calculate the unemployment rate and the participation rate using labour force statistics • interpret a Lorenz curve and a Gini coefficient for the distribution of income in an economy • synthesise and evaluate key problems and issues facing the Australian economy.
 * Apply economic skills**

Students learn about:


 * Economic issues in the Australian economy**

//Economic growth// • aggregate demand and its components: Y = C+I+G+X–M • injections and withdrawals (I+G+X; S+T+M) • the simple multiplier: k = 1/(1–MPC) • measurement of growth through changes in real Gross Domestic Product • sources and effects of economic growth in Australia • business cycle — trends

//Unemployment// • measurement – labour force – participation rate – unemployment rate • trends • types and causes – cyclical – structural – frictional – seasonal – hidden – long term • natural rate of unemployment - Full employment occurs when all unemployment is frictional, structural or hardcore and there is no cyclical unemployment. At full employment the unemployment rate is called the **natural rate of unemployment**. At the natural rate of unemployment there should be a non–accelerating inflation rate: that is, the inflation rate should not increase. - The natural rate of unemployment varies over time because of variations in frictional and structural unemployment. In the late 1960s and early 1970s the natural rate of unemployment would have been considered between 1-2%. At the current time it is around 5%.

• main groups affected by unemployment • effects of unemployment — economic and social costs - Labour, a scarce resource, is not being utilised fully and therefore economic growth is not at its optimum level. As a result people are not enjoying the highest standard of living the economy has to offer. - The government will have less revenue from income tax as people lose their jobs. - Government spending will rise through increased welfare payments, making unemployment an **opportunity cost**, as money could be spent elsewhere. - As unemployment increases there will be a fall in demand of g+s, which will result in smaller company profits, lower investment, further unemployment and a recessionary spiral. - Loss of self-esteem and other psychological, social and economic costs are often experienced by the unemployed - As unemployment increases, the inequality of income within society widens. This can lead to social problems e.g. a higher suicide rate and family violence

**• measurement — current Australian Bureau of Statistics measure**
==== ð Consumer Price Index: measure the changes in the prices of a selected regimen of consumer good and services over time using price index numbers. ==== ==== ð The regimen eleven categories: food, clothing and footwear, housing, household equipment, transport, alcohol and tobacco, health, recreation, education, communication, financial + insurance services. It is measured and weighted according to the 8 capital cities. ====

Previous Inflation 1
==== ð The rate of change in the CPI is measured 1/4ly à headline rate of inflation ==== ==== ð The ABD changed their method of measurement in 1998 – they now use the ‘acquisition method’, rather than the ‘outlays method’. ==== ==== ð The acquisition method of CPI is now used by the RBA as its inflation target – 2-3%  ==== ==== ð It is simple and widely understood measure and the public recognizes and accepts it as a measure of price movements every ¼  ==== ==== ð Underlying rate of inflation or core rate of inflation à a calculation of inflation that removes ‘one off’ and seasonal or volatile factors e.g. higher oil. It is a better indicator of trend inflation in the economy that CPI – it is calculated by the Reserve Bank and Treasury and is used in economy forecasting – the RBA used to use this for their inflation target before 1998. ==== ==== ð This can be calculated in 2 ways – trimmed mean (weighted mean of the central 70% - disregard top and bottom) or weighted median (list items according to their prices change and take the middle one) ====

 ð ­ 06-08 because of resource boom and ­ wage pressures à 4.5% ­ in CPI 07/08.
==== ð GFC – lower global commodity prices – downward pressure on inflation – inflation 1.5% June 08/09 – the lowest CPI outcome in a decade driven by low fuel prices and lower prices for deposit and loan facilities. ==== ====<span style="margin-left: 21.3pt; mso-list: l19 level1 lfo24; tab-stops: 22.7pt list 1.0cm; text-indent: -18.0pt;"> ð Tradables price inflation (extent of price rises for imported goods and services) – no increase 08-09. Non tradables inflation (price rises for domestically produced goods and services) eased from 5.6% in 2008 to 2.4% in 2009 – mainly due to lower housing costs and food prices. ====

<span style="margin-left: 36.0pt; mso-list: l19 level1 lfo24; tab-stops: 22.7pt list 36.0pt; text-indent: -18.0pt;"> ð Why is the general trend downwards overtime?
====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð RBA adopted inflation target in 1993, this provided an anchor for inflationary expectations, made conduct of monetary policy clearer and effective in controlling inflation. ==== ====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð Cuts in protection - ­ competition in product and factor markets - ¯ (this sign means decrease/increase depending on the context, sorry, on my computer it's an arrow) prices ==== ====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð Productivity bargaining in 1991 - wage negotiations, workplace agreements – helped contain wage cost pressures  ==== ====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð Permanents ¯ of inflationary expectations through macroeconomic policy à improved economic performance and lowered prices ==== ====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð Technological change and gloablisation reduced production costs and ­ competitive pressure on firms to contain prices. ====

<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð This quarter CPI = 2.9%
====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð During 08-09 inflation eased because of GFC, Australia’s spare capacity for production without an increase in prices, lower world commodity prices, slower growth in labour costs, lower housing costs. ==== ====<span style="margin-left: 14.2pt; mso-list: l19 level1 lfo24; tab-stops: list 14.2pt; text-indent: -14.2pt;"> ð Moderating CPI and underlying inflation in 08-09 allowed the RBA to make large cuts in IR to support Agg D and employment in the economy ====

**• causes**
====<span style="margin-left: 44.7pt; mso-list: l29 level1 lfo18; tab-stops: list 44.7pt; text-indent: -22.0pt;"> – **demand inflation –** when agg demand ­ beyond equilibrium – ­ in prices, without an ­ in output à to combat this, government would ¯ spending. ==== ====<span style="margin-left: 44.7pt; mso-list: l29 level1 lfo18; tab-stops: list 44.7pt; text-indent: -22.0pt;"> – AD>AS/GDP à ­ price pressure à ­ prices to ration available output among consumers à demand pull inflation. Happened 07/08 as full employment was reached and there was an ­ in Agg D à inflation. ====

====<span style="margin-left: 44.7pt; mso-list: l29 level1 lfo18; tab-stops: list 44.7pt; text-indent: -22.0pt;"> – **cost inflation** à ¯ of Ag S because of high wage prices or high costs of imported materials e.g. oil. This causes a new equilibrium to be set at a higher price and a lower GDP à contraction in real GDP and ­ inflation (stagflation - lower E.G., ­ inflation and ­ uployment). Can be caused by across the board wage ­ that don’t reflect and ­ in productivity, ­ in price of raw materials à ­ production costs, depreciation of AUD à ­ M $P, ­ IR, ­ in govt charges e.g. tax. ====

<span style="margin-left: 44.7pt; mso-list: l29 level1 lfo18; tab-stops: list 44.7pt; text-indent: -22.0pt;"> – **imported inflation**
==== Imported inflation is related to cost-push inflation as a rise in the prices of M e.g. oil in 70s à ­ in energy prices but also an increase in the price of goods and services that were dependent oil oil eg ­ price of petrol and transport. These are ‘second’ round effects. It has become a more prominent cause of inflation because of ¯ in protection and globalisation ====

**– Inflationary expectations**
==== An economy can experience demand-pull and cost-push inflation through a wage-price spiral. This maybe because of INFLATIONARY EXPECTATIONS (people’s perception of future inflation based on past and current rates of inflation. Inflationary expectations represent the behaviour of individuals and businesses within an economy in seeking compensation for the current inflation rate plus any expected price increases à demand higher wages à firms charge higher prices … ==== ====  The Short Run Phillips Curve shows the inverse relationship between unemployment and inflation. I.e govt attempts to ¯ unemployment by ­ govt spending – this could mean a trade off – more inflation for less unemployment OR they could cut govt spending and trade off less inflation for more unemployment.   ==== ====  The Long Run Phillips Curve represents that natural rate of unemployment. As govt ­ spending to ¯ unemployment they ­ inflation à means workers D higher wages as prices have ­ and their purchasing power ¯ à unemployment as employers are then forced to retrench workers. Therefore inflation ­ but unemployment stays static – so govt policies to ¯ unemployment only ­ inflation. This means the only way to ¯ unemployment is to cut inflation and ­ the flexibility of labour market. ====

**• effects**
====<span style="margin-left: 36.0pt; mso-list: l27 level1 lfo23; tab-stops: 22.7pt list 36.0pt; text-indent: -18.0pt;"> ð Inflation is regarded as an economic problem à ¯ in the value of money or real purchasing power. Income earners can suffer ¯ in Y, savings and investment decisions become distorted, the economy’s resources are misallocated, international competitiveness is ¯  ====

<span style="margin-left: 36.0pt; mso-list: l27 level1 lfo23; tab-stops: 22.7pt list 36.0pt; text-indent: -18.0pt;"> ð Distorts the pattern of resource allocation
====<span style="margin-left: 72.0pt; mso-list: l27 level2 lfo23; tab-stops: 22.7pt list 72.0pt; text-indent: -18.0pt;"> · Encourages investment in speculative + relatively unproductive activites e.g. gold and real estate as they are sheltered against inflation as their scarcity à value ­ as past as $P and value often exceeds inflation. ==== ====<span style="margin-left: 72.0pt; mso-list: l27 level2 lfo23; tab-stops: 22.7pt list 72.0pt; text-indent: -18.0pt;"> · ­ inflation à more resources allocated to these speculative industries instead of productive industries. ==== ====<span style="margin-left: 72.0pt; mso-list: l27 level2 lfo23; tab-stops: 22.7pt list 72.0pt; text-indent: -18.0pt;"> · Collapses in asset prices often occurs à represents waster savings and pressure on financial institutions to provide credit. ==== ====<span style="margin-left: 72.0pt; mso-list: l27 level2 lfo23; tab-stops: 22.7pt list 72.0pt; text-indent: -18.0pt;"> · Discourages investment in production capital, as returns take longer to materialize. ==== ====<span style="margin-left: 72.0pt; mso-list: l27 level2 lfo23; tab-stops: 22.7pt list 72.0pt; text-indent: -18.0pt;"> · Entrepreneurs reject low investment propositions because return>inflation, IR ­ as inflation ­ à more expensive to borrow for inflation, risk of loss from investment projects ­ when inflation ­, high inflation periods à ­ union militancy to ensure wages at least keep pace with price rises à rapidly ­ wages. ====

<span style="margin-left: 36.0pt; mso-list: l27 level1 lfo23; tab-stops: 22.7pt list 36.0pt; text-indent: -18.0pt;"> ð Income redistribution effects
====<span style="margin-left: 54.0pt; mso-list: l5 level1 lfo25; tab-stops: 22.7pt list 54.0pt; text-indent: -18.0pt;"> · Inflation alters the share of income and wealth in an economy as some groups gain real income at the expense of other losers. Therefore the size of a house’s real income depends on the amount and quality of resources available AND how they are distributed. ==== ====<span style="margin-left: 54.0pt; mso-list: l5 level1 lfo25; tab-stops: 22.7pt list 54.0pt; text-indent: -18.0pt;"> · Those who gain: borrowers of funds (value of repayments ¯ over time), well organized group in the economy (e.g. firms with little competition), owners of real assets e.g. land which usually at least keeps pace with inflation and often exceeds it. ==== ====<span style="margin-left: 54.0pt; mso-list: l5 level1 lfo25; tab-stops: 22.7pt list 54.0pt; text-indent: -18.0pt;"> · Those who lose: people on fixed dollar income (superannuation, pensions etc), lenders of money, poorly organized groups, people who hold their assets in money form e.g. bank deposits, exporters lose if their overseas prices fail to keep pace with rising costs associated with dom estic inflation after allowing for exchange rates. ====

<span style="margin-left: 36.0pt; mso-list: l27 level1 lfo23; tab-stops: 22.7pt list 36.0pt; text-indent: -18.0pt;"> ð International Competitiveness Effects
====<span style="margin-left: 54.0pt; mso-list: l26 level1 lfo28; tab-stops: 22.7pt list 54.0pt; text-indent: -18.0pt;"> · If Aust has higher inflation than its trading partners à ¯ in fall of international competitiveness  ==== ====<span style="margin-left: 54.0pt; mso-list: l26 level1 lfo28; tab-stops: 22.7pt list 54.0pt; text-indent: -18.0pt;"> · Rising costs of production à makes it even harder to sell our exports at a profit: foreigner’s costs of production ¯ more than Australia’s giving them a competitive advantage in foreign countries and Australia where M goods = comparatively cheaper à trade balances deteriorate (CAD ­ ) and a depreciation of AUD is likely à this would ­ inflation because of ­ prices for M g + s. Could result in a inflation-depreciation-inflation-depreciation cycle. ====

External stability occurs ** “when Australia’s trade and financial dealing with the rest of the world do not create significant issues triggered by the CAD, net foreign debt/liabilities or the value of the Australian Dollar.” ** This is ** “a situation in which the Australian economy is able to engage and meet commitments in world trade and international financial transactions in a sustainable manner.” ** ** • measurement ** ** To find percentages, it is the CAD, NFD or NFL over GDP x100 **
 * // External stability // **

** – CAD as a percentage of Gross Domestic Product ** CAD= -5.8% of GDP in MAR 2010 (-52.1% bn). Many claim that the CAD should not exceed 5-6% to be sustainable as debt repayments would become very high, therefore misallocating resources to servicing and thus reducing efficiency and restricting output. However, Professor Pitchford in the “Pitchford Thesis” has presented argument CAD sustainability is possible given appropriate debt structuring, i.e. if much of the debt is in private sector this is not a collective liability to the nation but mainly to the company, although impacts may be felt wider. Debts in private sector can be offset by profits gained from lending. For more information on this argument, see Ross Gittins à the Consenting Adults Deficit (CAD), implying debt is okay with responsibility. ** – net foreign debt as a percentage of Gross Domestic Product ** DEC 2009= 51.4% of GDP down from 56.3% previous year. Likely to increase with the CAD this year. Generally believed that 40% of GDP is an acceptably sustainable level. Depends on debt servicing ratio. ** – net foreign liabilities as a percentage of Gross Domestic Product ** Similar to above but account for net equity flows. ** - Exchange rate stability ** can also be seen as a measure of external stability. In one year APR 09-10, AUD rose from 59.1 -72.5 (USD) with a peak in MAR of 90+(USD). Fluctuations as compared to the trade weighted index are probably more significant. High fluctuations generally indicates a lower external stability.

** Trends ** Some stats accompany the above section however…trends tend to focus on the CAD size. CAD growth has continued in absolute terms. Spikes or blowouts in the CAD occurred especially during the mid-1980s due to cyclical economic factors Growth in foreign debt as capital inflow in capandfin account has moved from equity inflow to debt inflow( due to financial deregulation). In 2000, net foreign debt was $294bn, in 1980 less than $15bn. CADs have significantly added to the foreign debt Fluctuations in AUD continue. Volatility of AUD as compared to the USD is quite pronounced. Mid-2001, AUD fell bellow USD$0.50, but by jan 2004 risen $USD0.75. Due to globalised, deregulated world, hot money is frequently subject to fluctuation and as such this is a less important measure. Trade weighted is more important. ** • causes and effects ** High NFD/L à High Servicing/Interest Costs à Higher Income Deficits à Increase in CAD…etc. in a cyclical fashion. Causes may be split into Cyclical and Structural. ** Cyclical Causes ** <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 1. Changes in TOT (e.g. a worsening in the TOT will reduce export revenue and make servicing more difficult, increasing debts. Also consider BOGS) <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 2. Levels of Domestic Growth (domestic growth will allow for greater income and output to service debts) <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 3. Level of growth in trading partners (change in trading partner growth will affect demand for Australian exports and therefore our export revenue (consider BOGS here)) <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 4. Exogenous factors e.g. GFC and Droughts (impact on both supply and demand and therefore revenues associated) <span style="margin-bottom: 0cm; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.0pt; mso-list: l0 level1 lfo1; tab-stops: list 36.0pt; text-indent: -18.0pt;"> 5. Exchange rate fluctuations (can be a result lack of consumer confidence à reduction in capital inflows will increase proportional debts. Furthermore exchange rate depreciation results in a decrease in the real debt owed but may induce inflation and worsen BOGS/TOT and thus further increase debts)

** Structural causes ** <span style="margin-bottom: 0cm; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.0pt; mso-list: l1 level1 lfo2; tab-stops: list 36.0pt; text-indent: -18.0pt;"> 1. Past CADs and existing debt levels à possible debt trap <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 2. Low savings (may be solved by renewing culture of savings, microeconomic saving reforms e.g. superannuation) <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 3. Narrow production and export base (result of reduction in protection and specialization resulting from free trade/globalization. This creates a reliance on imports, impacting BOGS, CAD and general debts) <span style="margin-bottom: 0cm; margin-left: 36.0pt; margin-right: 0cm; margin-top: 2.0pt; mso-list: l1 level1 lfo2; tab-stops: list 36.0pt; text-indent: -18.0pt;"> 4. Domestic inflation à Reduce International Competitiveness as well as hampering attractiveness for investment. <span style="color: windowtext; margin-bottom: 0cm; margin-left: 36pt; margin-right: 0cm; margin-top: 2pt; text-indent: -18pt;"> 5. Natural factor endowments ( may force narrow export base or import reliance)

** The above may also be grouped into: ** Economic Growth Globalisation Net Income Transfer (** N.B. this accounts for 60-80% of CAD each year) ** Terms of Trade Savings/Investment Gap.

<span style="display: inline !important; margin-top: 2pt;">** Benefits **

Increased productive capacity, job creation, development opportunities and innovation. Allows productive expansion and may, in time, allow such growth which will pay off debts. Opposite argument for external shocks à see Pitchford thesis above ** Costs ** Burden of debt servicing/debt trapping Loss of confidence à reduction investment (poor credit ratings) Exchange rate volatility à detrimental impact on investment, trade and growth stability Increased vulnerability to external shocks as fluctuations in exchange rates with affect terms of trade and thus macropolicy may be used to support it (misall).

//Distribution of income and wealth// • measurement — Lorenz curve and Gini coefficient • sources of income as a percentage of household income • sources of wealth • dimensions and trends, according to gender, age, occupation, ethnic background and family structure • economic and social costs and benefits of inequality

//Environmental management// • ecologically sustainable development - the idea that production must be changed to avoid unacceptable impacts on the natural environment - producing products which are non polluting, encouraging technologies which minimise energy use and natural resource use per output - necessary because of the need to achieve ** intergenerational ** ** equity ** and ** protect biodiversity **

• private and social costs and benefits — market failure à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> PRIVATE COSTS = costs of production paid by the firm producing the product à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> SOCIAL COSTS = combined private and external costs. External costs = costs not accounted for in the firm’s costs. Example: mining asbestos might cause health problems which is an external cost. Social Cost often higher than private costs à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Private benefits include profits made by firms or utility/satisfaction gained by consumers à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Social benefits affect the wider community. Production benefits are if one firm’s production benefits another, consumption benefits where one person consuming a good benefits other people around them. Example: A person going to the doctor when they are sick obtains the private benefit of getting better and the social benefit of not affecting others with the illness. <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> à __<span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Market failure __<span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;">: when there are external costs and benefits associated with the production or consumption of a product not included in the nominal price. <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Production is higher than it should be when social costs are not accounted for in the price <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Consumption of some products is lower than it should be because buyers ignore external benefits

• public and private goods — free riders à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Private goods are considered excludable (those unwilling or unable to pay for a good are excluded from using it or gaining utility/satisfaction from it) and rival (if a good is consumed by one person it can’t be consumed by another) – for example, food, cars, etc. à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Public goods are non-excludable (benefits of G&S not restricted to purchasers) and non-rival (one person’s consumption doesn’t affect anyone else’s ) <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;">, for example defence, beaches, etc. NB: not all goods and services provided by govt. are necessarily public, eg. health services and transport are still excludable and rival. à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Free riders are those who obtain benefits without choosing to pay for a good. Because public goods can be enjoyed without paying, many consumers choose to not contribute to the provision/maintenance or the good or service. Free riding prevents allocative efficiency with environmental resources, amenities and services and leads to market failure.

• issues: – preservation of natural environments à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;">Conservation: establishing value of natural environment & identifying policies to ensure best use à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;">natural environment provides: natural resources (essential inputs in the production of food, energy and manufactured goods), a waste absorbing system (but too much waste = pollution), benefits to people (eg. scenery, bushwalking, camping, fishing), biodiversity à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> government initiatives to preserve natural environments: national parks, state forests, restrictions on clearing vegetation on private land, regulatory limits on waste disposal – pollution control à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Costs: health problems, loss of use and value of the environment, destruction of property and loss of recreational facilities à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> firms typically try to use the cheapest method to reduce pollution which doesn’t always lead to optimum pollution reduction à <span style="color: #2a2a2a; font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> optimum level of pollution abatement is a trade-off between the abatement cost and the external costs caused by the pollution. The net benefit to society is maximised when the extra external costs just equal the extra abatement costs. Hence aiming for zero pollution is not economically optimum – externalities à Negative production externalities eg. pollution à Positive production externalities, where production activities of one firm assist/benefit another firm à Negative consumption externalities, eg. using a car causes pollution and health problems for others à Positive consumption externalities where benefits are gained by others when someone consumes a good or service, eg. someone wearing perfume – depletion of renewable and non-renewable resources. à <span style="font-family: 'Tahoma','sans-serif'; font-size: 10pt;">More production (for higher economic growth) involves use of more natural resources. Fears of inadequate/depleted future supplies. à <span style="font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Renewable resources- eg fish, forests, fertile land, can regenerate over time & sustained indefinitely, overcome fears shortages of other resources. Eg solar, wind à <span style="font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> Non renewable resources- most mineral resources (coal, iron ore), fossil fuels (natural gad, oil)- limited supply. <span style="font-family: 'Tahoma','sans-serif'; font-size: 10pt;">Non recyclable- resources scarce à <span style="font-family: 'Tahoma','sans-serif'; font-size: 10pt;"> increase prices, trigger reactions to deal with depletion. <span style="font-family: Tahoma,sans-serif; font-size: 10pt; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm;">Recyclable- recapture of resources used in production & return resource to reuseable form. Metals eg steel- cheaper. Depletion less concerning when recyclable. Negatives- high collection costs, additional investment, consumer resistance.